Stock Price Formulation

How is order priority decided?

Update : Jan. 04, 2010

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Answer:

During auction trading, priority among orders is decided on two principles, price and time priority, to ensure that all orders are handled equally and that transactions proceed smoothly.

  • Price priority
    Price priority means that the lowest sell and highest buy orders take precedence over other orders. Thus if there are sell orders at 100 yen, 101 yen, 102 yen and 103 yen, the order at 100 yen takes precedence. Equally for buy orders at the same prices, the order at 103 yen takes precedence.
    As mentioned before market orders take priority over limit orders. (See 'What different kinds of orders are there?' for a definition of market and limit orders.)
    What different kinds of orders are there?
  • Time priority
    Time priority means that among orders at the same price, the order placed earliest takes precedence. Thus if Trading Participant A places a sell order for 1,000 shares at 100 yen, and then Trading Participant B places an identical order, it is A's order that takes priority and will be executed first.

The following table illustrates how these two principles work together.

Offer (sell) Price Bids (buy)
A300(5) C400(4) 502  
D1,000(3) E900(2) F500(1) 501  
  500 H8,000(1) B100(2) J400(3)
  499 K100(4) A15,000(5)
late     early   early     late

Note:
Numerals - number of shares ordered
Numerals in brackets - order of priority
Alphabet - securities company identifier

Thus although there are sell orders at both 501 yen and 502 yen, those at 501 yen take precedence as a result of price priority. Of the three orders at 501 yen, Trading Participant F's order takes precedence, followed by Trading Participant E and then Trading Participant D, as a result of time priority. These are then followed by the orders at 502 yen, with Trading Participant C's order taking precedence over Trading Participant A's order.

Looking at the buy side, we can see that there are orders at 499 yen and 500 yen. In this case the orders at 500 yen take precedence due to price priority. Of the three orders at 500 yen, Trading Participant H's order takes precedence, followed by Trading Participant B and then Trading Participant J, as a result of time priority.

Thus each offer and bid is individually prioritised and executed accordingly.

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