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Let's say, there are three bid prices 100, 101, and 102, and three ask prices 101, 103, 104.

What will happen, will ask:101 sell to bid:101 or bid:102, if the dealer is going to make the 101 to 101 deal, this will seem strange because the one offering a higher price cannot get the stock.

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    In this case, people will start buying at 101(ask) and selling at 102(bid) until the ask becomes more than the bid. In other words, this risk free profit opportunity will be arbtitraged away by the HFTs within a nanosecond. That is my understnading – Victor123 Feb 10 '14 at 15:30
  • @Kaushik Arbitrageurs often play a role in markets and their efficiency, but they're not necessary in this case. Each of the orders above would have been deemed to arrive at some point in time (in a sequence), and if there were a compatible order on the other side, they'd be matched up and a transaction would take place -- no arbitrage necessary. The situation above shouldn't occur in practice. – Chris W. Rea Feb 10 '14 at 19:39
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    I actually saw this happening for Symbol=SRS in my paper trading testing (for Dec 24 2018, 9:30 AM). i.screenshot.net/w4z8va5 is screenshot when big price was above the current price. Also, i.screenshot.net/pzq90i8 when ask price was below the current price. It left me scratching my head! – Mayank Jain Dec 31 '18 at 8:08
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It depends on the sequence in which the order [bid and ask] were placed. Please read the below question to understand how the order are matched.

How do exchanges match limit orders?

4

The situation you're proposing is an over-simplification that wouldn't occur in practice. Orders occur in a sequence over time. Time is an important part of the order matching process.

Orders are not processed in parallel; otherwise, the problem of fairness, already heavily regulated, would become even more complex.

First, crossed and locked markets are forbidden by regulators. Crossed orders are where one exchange has a higher bid than another's ask, or a lower ask than another's bid. A locked market is where a bid on one exchange is equal to the ask on another. HFTs would be able to make these markets because of the gap between exchange fees.

Since these are forbidden, and handling orders in parallel would ensure that a crossed or locked market would occur, orders are serialized (queued up), processed in order of price-time priority.

So, the first to cross the market will be filled with the best oldest opposing order.

Regulators believe crossed or locked markets are unfair. They would however eliminate the bid ask spread for many large securities thus the bid-ask cost to the holder.

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    @quantycuenta I would suggest: You need to more clearly tie your explanations back to the original question. (See my edit, above.) Draw the line -- don't just dot it faintly and then dive into detail. While many of us here are knowledgeable enough to connect the dots between a question and your answer, you should assume instead that the audience for your answer is a layperson. This site is "for people who want to be financially literate." Seek to write answers almost anyone can understand. You can use industry jargon, but back it up for those who aren't in-the-know. – Chris W. Rea Feb 10 '14 at 15:35
  • p.s. See my edits. I added the first paragraph to try and "fill in the line" where I found only dots. – Chris W. Rea Feb 10 '14 at 15:35
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    Yes, I simply restated what you wrote. Simply. I didn't aim to add new information, but to draw the line from question to answer in a more solid color. Getting from "not processed in parallel" to "time is important" may be evident to you and me, but not everybody understands what a parallel process is. Also, your answer did lack pointing out that the example is an over-simplification. Starting with that clearly ties your answer back to what was asked. What comes after supports & elaborates. Yes, do aim to write for more people to understand. Use jargon, but back it up. – Chris W. Rea Feb 10 '14 at 16:23
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    Thanks. And, re: "wrong". IMHO, as long as you're polite and constructive and can explain in terms that can be easily understood, there's often more good than harm in correcting somebody's misconception. Also, there are many alternatives to the word "wrong", too, that may come across as less harsh. e.g. "I wouldn't quite put it that way", or "you're missing something", or "almost, but not quite", or "have you considered..." etc. – Chris W. Rea Feb 10 '14 at 19:29
  • Nonetheless, quantycueta has written a good answer, so it means, when there is a ask price for 101, 103, 104 on the market, if the 102 bid price came, they will trade at 102, if the 101 bid price came first, they will trade at 101, right? – dspjm Feb 11 '14 at 3:58

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