What happens if stop market orders are activated and there is zero volume in the book?

Question

I am developing an order matching system and I have a few scenarios that I would like to confirm my understanding of.

From my understanding, a stop order will be activated when the last traded price reaches the stop price of the order. Does a stop order activate if there exists an order in the book that satisfies the stop price of the order but the last traded price does not? For example, suppose the book is initially empty, the last bid price is 80, and a bid limit order is placed with a price of 100. Now, suppose that a stop market order on the ask side is placed with a stop price of 90. Would the stop order be activated? I would assume not, because the last traded price is still 80 - some trade would need to occur such that the last bid price became 90 or greater even though there exists a suitable offer.

My next question concerns volume. What happens if stop market orders are activated and there is zero volume in the book? Suppose that there are no orders in the book and the last ask price is 100. Now, suppose that a stop market order on the bid side is placed with a stop price of 100. Will that stop order be activated but not filled? Or will it not be activated since there is zero volume?

Apologies if this question has been asked before and thanks for any input in advance.

Answer 1

I'll answer under the assumption that this trading is taking place on a major Exchange with a standard central limit order book that follows standard order acceptance and fulfillment mechanics. I trade futures on CME Globex but the conclusions I draw should apply to any CLB exchange and any centrally cleared security or derivative.

1. A stop order type is an order which, when accepted, does not immediately go on the book, but must be triggered by a trade in the market at the price level submitted with the order. So to be very specific, some trade would need to occur at or in excess of 90 for the stop to activate. Doesn't matter where the best bid sits, until a trade occurs in excess of the stop, the order isn't in the market and won't fill.

2. The order will be activated but not filled. If we follow the order book behavior as outlined above, the stop will activate given the last trade price and simply become the first order on the bid side of the book. It will fill according to the additional specifications of the order (stop w/ protection, stop limit etc.) once an appropriate order is placed ask side.