Purchasing Method

[TheMotorcycleBoy]

Their role sounds fairly to what I iterated in my earlier.

i.e.

Both the New York Stock Exchange (NYSE) specialist and the Nasdaq market maker try to increase the liquidity on their respective exchanges and provide more fluid and efficient trading.

A specialist is a dealer representing a NYSE specialist firm

[mc2fool]

Their role sounds fairly to what I iterated in my earlier.

i.e.

Both the New York Stock Exchange (NYSE) specialist and the Nasdaq market maker try to increase the liquidity on their respective exchanges and provide more fluid and efficient trading.

A specialist is a dealer representing a NYSE specialist firm

There is no "their" on the Nasdaq. It, like the LSE, is totally electronic and has no trading floor and has no people you see on the phone, shouting stuff or keying data into hand held devices.

[TheMotorcycleBoy]

This article describes human presence at NYSE (and refers to a couple of other exchanges)
https://qz.com/1078602/why-the-new-york ... ing-floor/

The DMMs are given money (rebates) in exchange for providing regular stock price quotes, liquidity, and maintaining orderly trading. To receive those incentives, major high-frequency trading firms like Virtu Financial (which also operate at other big stock exchanges) have to place human workers on the trading floor, too. At NYSE there are computerized electronic-only firms trading that aren’t DMMs, but their rebates aren’t as lucrative because their trading requirements aren’t as stringent.

and regards those hand held devices people are often shown holding in equity-market related news items:

Here again, the humans on NYSE’s floor have a special advantage: Brokers can use the d-Quote, which gives them almost 15 minutes of extra time to tweak or add stock orders at the end of trading, which can be the most important price of the day. In the world of computerized trading, as one trader put it, that quarter of an hour is like a few months in human time: news can break, and thousands of other trades can take place during that 15 minutes.

The only way to access the d-Quote is through a floor broker with a handheld device. This order type is incredibly popular, and it means that a significant amount of vital trading still involves human reaction. Market-structure experts say it could probably be done without a trading floor, however.

As far as I could ascertain this d-Quote thing and this type of human interaction don't manifest in the LSE.

Apologies for derailing the "Purchasing Method" thread. I was just curious about how much of my trading experience is automated......and yeah, most of it is.

Matt

[Gengulphus]

So whilst I understand that the trading is largely electronic (automated?) i.e. by SETS and other systems e.g. https://en.wikipedia.org/wiki/London_St ... Technology. Surely there is still a role played by human actors even now?

Yes - basically for big deals, i.e. ones that are a reasonably noticeable percentage of the company's market cap. The electronic trading systems deal pretty well with 'everyday' trades - e.g. a typical private investor trade in a megacap company might be a millionth (0.0001%) of the company's market cap - and indeed with trades that are quite significantly bigger percentages than that. But if you want to trade a much-bigger-than-usual percentage of the company, humans probably need to get involved. E.g. if you want to sell 5% of a company, trying to get the electronic systems to do it all at once simply won't find a matching buyer; trying to get them to do it a bit at a time using 'at best' orders will drive the price down and so get a seriously depressed price for the bulk of them; trying to do it with limit orders can avoid the seriously-depressed-price problem but will probably take a long time, so isn't a solution if you want to complete the selling in a hurry... What you want is to find a matching buyer, who might be out there but having the same problem in reverse for trying to buy 5% of the company - and you might need to negotiate with them: for instance, you might be willing to accept a small percentage discount to the market price for the sake of getting the sale done, but not be willing to reveal your hurry to sell to the market at large (because the market will take advantage of it!). That's where the 'human actors' come in. Market makers will often know of investors who are on the lookout for a chance to buy or sell significant shareholdings in particular companies, without wanting to reveal their wishes to the market at large, and so can bring them together or act as intermediary in price negotiations between them.

Another place where 'human actors' come in is simply that the electronic systems will generally refuse orders that are too large. How they refuse them varies: the RSP network (which is the "quote valid for 15 seconds" system that private investors generally use) will fail to produce a quote; the LSE's electronic order book (which private investors need a DMA (Direct Market Access) account to access directly) has options to reject it (a 'fill or kill' order), trade as much as it can regardless of price (an 'at best' order), to keep it on the order book until it is possible (a limit order) and a number of more esoteric options; brokers' own systems will use broker-specific methods. Those broker-specific methods might include human 'backstops': I've actually experienced that with one of the half-dozen brokers I've used, when I decided I wanted out of a rather large holding of a smallcap and didn't care too much if I didn't get an especially good price for it: basically, I no longer rated the company's prospects and reckoned that the longer I took to sell, the more the price would fall, and if I remember correctly, I'd found another opportunity that I did want to buy into if I could raise the funds. So I entered an online limit sell order for the entire holding at a price a bit below market price - don't remember just how much, but I think 2% below would have been my thinking. And the holding neither sold nor brought the market price down - which was a clear indication that it was being held in the broker's system, waiting for a buyer to emerge. That had happened a few times before, but the next bit was quite unusual: I got a phone call from the broker, saying that their (human) trader had been in contact with a market maker, who did have a potential buyer but they weren't willing to go quite as high as my limit price. Was I interested? If so, I could cancel my existing order and re-enter it with a slightly lower limit price, and it would probably go through. I did think about it, and decided that yes, in the case of that share I did value a quick sale enough to justify giving the buyer a slightly better bargain than I'd envisaged, so did as suggested, and the trade duly went through.

And that and a few other episodes over the years have told me that at least that particular broker's electronic systems do fall back on humans to handle the difficult trades. Or at least, the fairly high-value ones from well-established clients who give them a decent amount of business: I do generally deal in rather larger quantities than I imagine the majority of their clients do and reasonably frequently (though quite a way short of getting 'frequent trader' commission discounts), so I can't guarantee that every client gets the same treatment!

Finally, note that for all but smallcaps, the above only really affects funds and very wealthy individual investors. The 5%-of-market-cap figure I used as an example is quite a bit higher than needed to make a trade big enough to not be handled well by the electronic systems, just to make the point clear. A 0.5%-of-market-cap trade would almost certainly be big enough, and I can say from experience with one particular smallcap that for it, a 0.05%-of-market-cap trade is enough to be on the fringes of being big enough. For a £10-50b large cap share, that would be a £5-25m trade - well beyond the sensible holding size for all but a tiny proportion of individual investors; however, for a £10-50m smallcap, it's a £5-25k trade and well within the scope of a reasonably wealthy individual investor's holding sizes.

Edit: Just to be clear, I'm only addressing the question of whether there are 'human actors', not of where or how they're doing their 'acting'. On the questions about trading floors, etc, that much of this strand of the thread has been about, I suspect you already know more than I do!

Gengulphus

[TheMotorcycleBoy]

So whilst I understand that the trading is largely electronic (automated?) i.e. by SETS and other systems e.g. https://en.wikipedia.org/wiki/London_St ... Technology. Surely there is still a role played by human actors even now?

Yes - basically for big deals, i.e. ones that are a reasonably noticeable percentage of the company's market cap. The electronic trading systems deal pretty well with 'everyday' trades - e.g. a typical private investor trade in a megacap company might be a millionth (0.0001%) of the company's market cap - and indeed with trades that are quite significantly bigger percentages than that. But if you want to trade a much-bigger-than-usual percentage of the company, humans probably need to get involved. E.g. if you want to sell 5% of a company, trying to get the electronic systems to do it all at once simply won't find a matching buyer; trying to get them to do it a bit at a time using 'at best' orders will drive the price down and so get a seriously depressed price for the bulk of them; trying to do it with limit orders can avoid the seriously-depressed-price problem but will probably take a long time, so isn't a solution if you want to complete the selling in a hurry... What you want is to find a matching buyer, who might be out there but having the same problem in reverse for trying to buy 5% of the company - and you might need to negotiate with them: for instance, you might be willing to accept a small percentage discount to the market price for the sake of getting the sale done, but not be willing to reveal your hurry to sell to the market at large (because the market will take advantage of it!). That's where the 'human actors' come in. Market makers will often know of investors who are on the lookout for a chance to buy or sell significant shareholdings in particular companies, without wanting to reveal their wishes to the market at large, and so can bring them together or act as intermediary in price negotiations between them.

Thanks again, Geng,

Yes, your words above, make a lot of sense - well of course it is common sense, i.e. how any market can be expected to function.

Another place where 'human actors' come in is simply that the electronic systems will generally refuse orders that are too large. How they refuse them varies: the RSP network (which is the "quote valid for 15 seconds" system that private investors generally use) will fail to produce a quote; the LSE's electronic order book (which private investors need a DMA (Direct Market Access) account to access directly) has options to reject it (a 'fill or kill' order), trade as much as it can regardless of price (an 'at best' order), to keep it on the order book until it is possible (a limit order) and a number of more esoteric options; brokers' own systems will use broker-specific methods.

I like this in itself, as you've revealed some different kinds of orders here, i.e. "fill or kill", "best" and "limit". The first one sounds pretty obvious - and I'll try to look the other two up sometime.

Those broker-specific methods might include human 'backstops': I've actually experienced that with one of the half-dozen brokers I've used, when I decided I wanted out of a rather large holding of a smallcap and didn't care too much if I didn't get an especially good price for it: basically, I no longer rated the company's prospects and reckoned that the longer I took to sell, the more the price would fall, and if I remember correctly, I'd found another opportunity that I did want to buy into if I could raise the funds. So I entered an online limit sell order for the entire holding at a price a bit below market price - don't remember just how much, but I think 2% below would have been my thinking. And the holding neither sold nor brought the market price down - which was a clear indication that it was being held in the broker's system, waiting for a buyer to emerge.

Wow. That's very interesting, especially this bit nor brought the market price down, that is, the clear implication of there being a lack of corruption, and that you as a client have been handled in an honest fashion.

...I got a phone call from the broker, saying that their (human) trader had been in contact with a market maker, who did have a potential buyer but they weren't willing to go quite as high as my limit price. Was I interested? If so, I could cancel my existing order and re-enter it with a slightly lower limit price, and it would probably go through. I did think about it, and decided that yes, in the case of that share I did value a quick sale enough to justify giving the buyer a slightly better bargain than I'd envisaged, so did as suggested, and the trade duly went through.

Well, that's a pretty good service. Indeed one that would be difficult to automate!

thanks again,
Matt

[Gengulphus]

I like this in itself, as you've revealed some different kinds of orders here, i.e. "fill or kill", "best" and "limit". The first one sounds pretty obvious - and I'll try to look the other two up sometime.

As you say, 'fill or kill' is pretty obvious: it basically gives a number of shares to trade and a limit price and says "match this entire order against the existing orders on the order book; if you can't match the entire order, reject the whole thing".

An 'at best' order only gives a number of shares and says "match this entire order against existing orders on the order book, matching against better-priced orders first but with no limit on how bad a price you'll match against; if there aren't enough existing orders around to match it, reject it." (I don't remember offhand whether that means "reject it entirely" or "reject the part that can't be matched, but still go through with the part that can.)

A 'limit' order gives a number of shares, a limit price and an expiry date/time and says "match as much as possible of this order against existing orders on the order book; if there's any of it left, put the rest of it on the order book". Note that when you give a broker a limit order, that doesn't necessarily result in them giving the LSE a 'limit' order: in particular, a simple (and I suspect common) way of dealing with a customer's limit order is to put it on the broker's systems, which monitor the share's bid/offer prices until it looks as if the order will execute, then issue it as a 'fill or kill' order to the LSE's systems.

Those broker-specific methods might include human 'backstops': I've actually experienced that with one of the half-dozen brokers I've used, when I decided I wanted out of a rather large holding of a smallcap and didn't care too much if I didn't get an especially good price for it: basically, I no longer rated the company's prospects and reckoned that the longer I took to sell, the more the price would fall, and if I remember correctly, I'd found another opportunity that I did want to buy into if I could raise the funds. So I entered an online limit sell order for the entire holding at a price a bit below market price - don't remember just how much, but I think 2% below would have been my thinking. And the holding neither sold nor brought the market price down - which was a clear indication that it was being held in the broker's system, waiting for a buyer to emerge.

Wow. That's very interesting, especially this bit nor brought the market price down, that is, the clear implication of there being a lack of corruption, and that you as a client have been handled in an honest fashion.

Just to be clear, the implication of it not having brought the market price down was that the broker hadn't put the order on to the LSE's systems - if they had, either it would have executed or it would have become the lowest price at which shares were being offered, i.e. the 'offer' or 'ask' price, and the 'bid' and 'mid' prices would have been lower. And a second-level implication is that there weren't enough buyers on the LSE's systems at prices greater than or equal to my (original) limit price, otherwise they could have put my order into the LSE's systems and it would have been matched immediately by one or more of those buyers' orders.

...I got a phone call from the broker, saying that their (human) trader had been in contact with a market maker, who did have a potential buyer but they weren't willing to go quite as high as my limit price. Was I interested? If so, I could cancel my existing order and re-enter it with a slightly lower limit price, and it would probably go through. I did think about it, and decided that yes, in the case of that share I did value a quick sale enough to justify giving the buyer a slightly better bargain than I'd envisaged, so did as suggested, and the trade duly went through.

Well, that's a pretty good service. Indeed one that would be difficult to automate!

Again just to be clear, it went beyond the service I pay for - I think it was basically the telephone dealing service, not an online one. I suspect (but certainly don't know) that what they do is produce an automated list of online orders that aren't executing but are close to being able to do so, and keep that list available to their telephone dealers to work on during otherwise-slack periods. From their point of view, they're paying their dealer anyway, so getting the online commission when they wouldn't otherwise basically adds to their revenues and not to their costs, so goes straight through to profits... Not as good as getting the telephone commission, but better than nothing, and it also helps to keep the customers happy!

So basically, don't expect that level of service from any online broker! But one might happen to get it...

Gengulphus

[TheMotorcycleBoy]

Thanks Geng,

An 'at best' order only gives a number of shares and says "match this entire order against existing orders on the order book, matching against better-priced orders first but with no limit on how bad a price you'll match against; if there aren't enough existing orders around to match it, reject it." (I don't remember offhand whether that means "reject it entirely" or "reject the part that can't be matched, but still go through with the part that can.)

Would an example of this be: I place an order to buy 20 shares, and if the broker's order book only has sales orders of

15 @ £5.00
21 @ £5.50
24 @ £6.00

then the order would be rejected at this point in time? And would (in the above pricing scenario) only be accepted if there were at least 20 shares offered @ £5.00?

A 'limit' order gives a number of shares, a limit price and an expiry date/time and says "match as much as possible of this order against existing orders on the order book; if there's any of it left, put the rest of it on the order book"....

I'm a little unsure about this one too, I'm afraid. Citing the above example with slight extension, if I'd asked to buy 20 shares at a limit price of £5.00, then with the outstanding sales orders as above, would I then receive only 15 shares @ £5.00, and my remaining request for an additional 5 remain on the buy side of the order book?

(Apologies - you may have noticed that I have taken a pot shot at trying to visualise how this order book entity works......and I'm not quite 100% sure that I got it right!)

Again just to be clear, it went beyond the service I pay for - I think it was basically the telephone dealing service, not an online one. I suspect (but certainly don't know) that what they do is produce an automated list of online orders that aren't executing but are close to being able to do so, and keep that list available to their telephone dealers to work on during otherwise-slack periods. From their point of view, they're paying their dealer anyway, so getting the online commission when they wouldn't otherwise basically adds to their revenues and not to their costs, so goes straight through to profits... Not as good as getting the telephone commission, but better than nothing, and it also helps to keep the customers happy!

What you've said does sound very plausible.....and how a decent business would be run, in my opinion!

Matt

[BusyBumbleBee]

Interesting article in last week's IC. "Truth about Market Makers". Lots of good stuff in there but worryingly they talk of 'Dark Pools' which are apparently invisible to the PI.

Two small quotes from the article

The LSE has partnered with large market participants to introduce the
Turquoise exchange, which facilitates demand from
institutional investors for dark pool liquidity

Only 4 per cent of the market capitalisation of a stock
can be traded in any one dark pool and there is a limit
of 8 per cent being traded in all dark pools.

You can find out more here: https://www.lseg.com/areas-expertise/ou ... /turquoise

[Gengulphus]

An 'at best' order only gives a number of shares and says "match this entire order against existing orders on the order book, matching against better-priced orders first but with no limit on how bad a price you'll match against; if there aren't enough existing orders around to match it, reject it." (I don't remember offhand whether that means "reject it entirely" or "reject the part that can't be matched, but still go through with the part that can.)

Would an example of this be: I place an order to buy 20 shares, and if the broker's order book only has sales orders of

15 @ £5.00
21 @ £5.50
24 @ £6.00

then the order would be rejected at this point in time? And would (in the above pricing scenario) only be accepted if there were at least 20 shares offered @ £5.00?

No. First, I was talking about LSE order types, so it's the LSE's order book that is relevant. The broker's order book (if it exists at all) is only relevant in that the broker might choose to execute the order internally and not use external systems like the LSE at all (*).

Secondly, reading your question as being about the LSE order book rather than the broker's order book, and assuming the broker put your order on the LSE (unlikely, I suspect - the RSP network would almost certainly be better for an order that small), still no. What would basically (**) happen is that your 'at best' order would match the 15 shares @ £5 and 5 of the 21 shares at £5.50, leaving the order book on 16 shares @ £5.50 and 24 @ £6.00. The only way that rejection would be involved on an 'at best' buy order is if it was trying to buy more shares than the total 15+21+24 = 60 available on the order book - and if that were the case, as I said I'm uncertain whether it would be a complete rejection, resulting in you buying no shares at all, or a partial one, resulting in you buying all 60 shares available and the rest of your order being rejected.

As to how the broker would report the trade to you, it would probably be that you'd spent 15*£5.00+5*£5.50 = £102.50 on your 20 shares, and so had paid £102.50/20 = 512.5p per share. Plus commission and stamp duty, of course!

But as my use of "would" indicates, this is all rather hypothetical. The reason is that you almost certainly won't be entering 'at best' orders into the LSE's order book system. Online brokers commonly offer at best and limit orders to their clients (and possibly other types that vary between brokers), but as I said, a broker's limit order does not necessarily become an LSE 'limit' order. The same goes rather more strongly for broker at-best and LSE 'at best' orders: every online broker's at-best orders that I've encountered produce a quote and give you 15 seconds to accept it if you want, failing which the quote times out. That's the distinguishing mark of an order handled by the RSP network, not the LSE's system: basically, the broker forwards your order to all of the RSPs it uses (***), who respond with quotes to match the entire order or refuse/fail to produce such a quote (which in particular they'll do if your order would push their holding beyond its acceptable size limits), the broker selects the best of the quotes and offers it to you or tells you that it can't be done if it gets no quote back.

In short, a broker's at-best order should generally be regarded as "at the best price available for this size from any individual RSP", while an LSE 'at best' order should generally be regarded as "at the best total price available from the orders on the LSE order book, viewed collectively".

(*) By the way, if you're worried about the possibility of a conflict of interest in the broker being able to choose to do that, allowing them to buy your shares off you cheaply or sell shares to you expensively, that's one of the reasons why it's a very good idea to check who a broker is regulated by! UK regulations at least require them only to make such a choice when it's in the client's interests or strongly expected to be, and brokers' terms & conditions generally say something to that effect in their small print about execution policy.

(**) "Basically" because there are all sorts of exceptions caused by special options on the orders on the order book - don't ask me to explain them, because I can't. I knew some of them several years ago, but even that knowledge has faded - and a brief look at the LSE's technical library says that even if it hadn't, it would be seriously out of date!

(***) I believe brokers vary about which RSPs they use. "RSP" stands for "Retail Service Provider" and that basically indicates what they specialise in - dealing with the very large number of small orders, typically from individual investors, and doing it completely electronically for speed and low costs. It's a similar function to market makers, and I believe the same organisations often act as both market makers and RSPs - but they are different roles, operating on different systems and subject to different obligations: for instance, a market maker in a particular share must keep both buying and selling quotes of at least a specified minimum size available during market hours and can only stop doing so by resigning the role; an RSP isn't subject to any such requirement. This often causes confusion among people who don't understand the system: e.g. if a company releases bad news and everybody wants to sell their shares, the RSPs are liable to rapidly find themselves with as many shares as they want and respond by refusing to give selling quotes (which are of course quotes to buy more shares from the perspective of the RSP's holding) of any size at all for that share on the RSP network. So broker at-best orders simply don't succeed, and people who know a bit about market makers start asking "Why aren't the market makers meeting their obligations???" on the net. The answer is that they are, but the order isn't being attempted in a way that presents it to them in their market maker role.

A 'limit' order gives a number of shares, a limit price and an expiry date/time and says "match as much as possible of this order against existing orders on the order book; if there's any of it left, put the rest of it on the order book"....

I'm a little unsure about this one too, I'm afraid. Citing the above example with slight extension, if I'd asked to buy 20 shares at a limit price of £5.00, then with the outstanding sales orders as above, would I then receive only 15 shares @ £5.00, and my remaining request for an additional 5 remain on the buy side of the order book?

With the same qualifications about this being the answer only if we're talking about the LSE's order book and orders that are actually presented to the LSE's order book system, yes, that's basically correct.

One final comment is that as the above and my previous post indicate, the orders you give to your broker generally either don't go into the LSE's order book system or have been partially handled and possibly modified to get the desired effect by the broker before being put into it: you generally cannot put orders into the LSE system yourself. There is an exception: some brokers will supply "Direct Market Access" or "DMA" accounts which do allow you to do that, or at least, a few did when I last looked, some years ago. However, they all required one to be classified as a more sophisticated type of client than an ordinary 'retail client', and a consequence of that is that one gives up some of the FCA regulatory protections for 'retail clients'. I think the reason for that is that as the above indicates, using the LSE order book system does require a more sophisticated understanding of the system than a beginner investor would have. Your misunderstanding above about what an 'at best' order has actually made me understand one possible pitfall in using it! (Not that I've ever used it directly myself, or even applied for a DMA account - but I have contemplated doing so and wondered why the investor type requirement.) To see that pitfall, imagine that the order book at the time of your 'at best' order instead contained 15 shares @ £5, 21 shares @ £100 and 24 shares @ £1000, or that it contained 15 shares @ £5, 21 shares @ £5.50 and 24 shares at £1000 and some other investor submitted an 'at best' order for 20 shares a split second before you submitted yours...

My previous answer was that I suspect strongly that using the LSE order book system also requires a decent understanding that just because it technically allows behaviour of a particular type, that doesn't necessarily mean it isn't (criminal) market abuse. I still suspect that, but seeing the pitfall has helped me understand the requirement better...

Gengulphus

[TheMotorcycleBoy]

Interesting article in last week's IC. "Truth about Market Makers". Lots of good stuff in there but worryingly they talk of 'Dark Pools' which are apparently invisible to the PI.

Two small quotes from the article

The LSE has partnered with large market participants to introduce the
Turquoise exchange, which facilitates demand from
institutional investors for dark pool liquidity

Only 4 per cent of the market capitalisation of a stock
can be traded in any one dark pool and there is a limit
of 8 per cent being traded in all dark pools.

You can find out more here: https://www.lseg.com/areas-expertise/ou ... /turquoise

BBB I've got it! And I even read that article......I remember the spooky Dark Pools of Liquidity......but I can't remember it elaborating much further....will re-read it. I vaguely remember conjecture about whether the small cap market is rigged - but I think the overriding conclusion was no, it's just the lack of liquidity (sorry no dark pools for small fry I guess ) that sometimes makes it seem so.

[TheMotorcycleBoy]

Would an example of this be: I place an order to buy 20 shares, and if the broker's order book only has sales orders of

15 @ £5.00
21 @ £5.50
24 @ £6.00

then the order would be rejected at this point in time? And would (in the above pricing scenario) only be accepted if there were at least 20 shares offered @ £5.00?

No. First, I was talking about LSE order types, so it's the LSE's order book that is relevant. The broker's order book (if it exists at all) is only relevant in that the broker might choose to execute the order internally and not use external systems like the LSE at all (*).

Secondly, reading your question as being about the LSE order book rather than the broker's order book, and assuming the broker put your order on the LSE (unlikely, I suspect - the RSP network would almost certainly be better for an order that small), still no. What would basically (**) happen is that your 'at best' order would match the 15 shares @ £5 and 5 of the 21 shares at £5.50, leaving the order book on 16 shares @ £5.50 and 24 @ £6.00. The only way that rejection would be involved on an 'at best' buy order is if it was trying to buy more shares than the total 15+21+24 = 60 available on the order book - and if that were the case, as I said I'm uncertain whether it would be a complete rejection, resulting in you buying no shares at all, or a partial one, resulting in you buying all 60 shares available and the rest of your order being rejected.

Cripes! There's so much terminology and hidden details going on here.......at first you did throw me when you dropped in the "RSP network" term.

I did dig up a couple of references
https://www.sharesmagazine.co.uk/articl ... to-level-2
https://www.londonstockexchange.com/pri ... mation.htm

but then I saw you'd provided a condensed definition of your own here:

(***) I believe brokers vary about which RSPs they use. "RSP" stands for "Retail Service Provider" and that basically indicates what they specialise in - dealing with the very large number of small orders, typically from individual investors, and doing it completely electronically for speed and low costs. It's a similar function to market makers, and I believe the same organisations often act as both market makers and RSPs - but they are different roles, operating on different systems and subject to different obligations: for instance, a market maker in a particular share must keep both buying and selling quotes of at least a specified minimum size available during market hours and can only stop doing so by resigning the role; an RSP isn't subject to any such requirement. This often causes confusion among people who don't understand the system: e.g. if a company releases bad news and everybody wants to sell their shares, the RSPs are liable to rapidly find themselves with as many shares as they want and respond by refusing to give selling quotes (which are of course quotes to buy more shares from the perspective of the RSP's holding) of any size at all for that share on the RSP network. So broker at-best orders simply don't succeed, and people who know a bit about market makers start asking "Why aren't the market makers meeting their obligations???" on the net. The answer is that they are, but the order isn't being attempted in a way that presents it to them in their market maker role.

Thank you. I note the difference in obligations down to those two roles.

As to how the broker would report the trade to you, it would probably be that you'd spent 15*£5.00+5*£5.50 = £102.50 on your 20 shares, and so had paid £102.50/20 = 512.5p per share. Plus commission and stamp duty, of course!

Back to the original "best" order query - yes, understood. I had previously just misinterpreted that the granularity of how the best buy order was split over potentially/hypothetically several sale orders.

Now returning to the limit order:

A 'limit' order gives a number of shares, a limit price and an expiry date/time and says "match as much as possible of this order against existing orders on the order book; if there's any of it left, put the rest of it on the order book"...

I'm a little unsure about this one too, I'm afraid. Citing the above example with slight extension, if I'd asked to buy 20 shares at a limit price of £5.00, then with the outstanding sales orders as above, would I then receive only 15 shares @ £5.00, and my remaining request for an additional 5 remain on the buy side of the order book?

With the same qualifications about this being the answer only if we're talking about the LSE's order book and orders that are actually presented to the LSE's order book system, yes, that's basically correct.

Ok, thanks for confirming.

But as my use of "would" indicates, this is all rather hypothetical. The reason is that you almost certainly won't be entering 'at best' orders into the LSE's order book system....

In short, a broker's at-best order should generally be regarded as "at the best price available for this size from any individual RSP", while an LSE 'at best' order should generally be regarded as "at the best total price available from the orders on the LSE order book, viewed collectively"...

....I knew some of them several years ago, but even that knowledge has faded - and a brief look at the LSE's technical library says that even if it hadn't, it would be seriously out of date!

One final comment is that as the above and my previous post indicate, the orders you give to your broker generally either don't go into the LSE's order book system or have been partially handled and possibly modified to get the desired effect by the broker before being put into it: you generally cannot put orders into the LSE system yourself......
My previous answer was that I suspect strongly that using the LSE order book system also requires a decent understanding that just because it technically allows behaviour of a particular type, that doesn't necessarily mean it isn't (criminal) market abuse. I still suspect that, but seeing the pitfall has helped me understand the requirement better...

Gengulphus

Thanks again for your time putting together this kind of response. I'm starting to understand the gist of it, and may well, just out of interest buy myself a little introductory book into the workings of these markets. Do fear not however!.....I'm in no way planning on getting into level of involvement in our own investments . However, I always maintain that having this kind of knowledge is never a bad thing.

What interested me the most was, I guess due to my technical/professional background, was the notion of this thing called an order book in it's most abstracted form.

I'm guessing it can be viewed as a collection of entities, one per share traded, with a side containing "buy" requests and the another containing "sell" requests. The holder of this book then juggles the prices/numbers presented to either side of this thing, thereby maintaining "liquidity" and making a profit for themselves, and minimising their risk exposure. It's a fairly obvious concept, but one I'd never really bothered to give that much thought over in the past.

thanks
Matt

[tjh290633]

Matt, it might help if you had a look at "Level 2" trading, just in a demonstration. That would show you the online trading screen, with sell and buy offers, and you would see how the system works. Do a search and you should find https://www.moneyam.com/demo/?page=level2 which looks good.

TJH

[TheMotorcycleBoy]

Matt, it might help if you had a look at "Level 2" trading, just in a demonstration. That would show you the online trading screen, with sell and buy offers, and you would see how the system works. Do a search and you should find https://www.moneyam.com/demo/?page=level2 which looks good.

TJH

Thanks TJH,

I'm also reading

https://www.sharesmagazine.co.uk/articl ... to-level-2
https://www.londonstockexchange.com/pri ... 2guide.pdf

[Gengulphus]

... Do fear not however!.....I'm in no way planning on getting into level of involvement in our own investments . However, I always maintain that having this kind of knowledge is never a bad thing.

Very much my own attitude to such things - I've never interacted directly with the LSE's order book myself, for instance, but knowing that it's there and that other trading systems such as the RSP network are also there, and roughly how each of them works, is very helpful in understanding what is worth paying attention to (and what not). That applies especially to the less liquid shares, such as the smallcaps I invest in as a separate strategy alongside my HYP. For instance, if a share is in demand and I want to buy it, it can happen that I can't get an online at-best quote for it at all, or only for a pitifully small amount: that's because the RSPs are very short and so basically aren't willing to sell yet more. That doesn't mean that the shares are completely unavailable - but just that one needs to try other routes, especially ones that stand a chance of going to a market maker with their obligation to quote up to a specific size (the way that market makers have to deal with not wishing to sell more shares is by changing their quoted prices to discourage sellers or encourage them to go to other market makers). Online limit orders do have such a chance, at least with some brokers (maybe all, but I don't know that!), and so can be worth trying if one wants to buy or sell a share and is having no luck getting an online at-best quote. This does lead to the oddity of sometimes entering a limit order with a limit price that the current market price already meets!

Or another one is knowing just how little attention to pay to the balance between 'buys' and 'sells' in an online trade-reports facility such as that available from ADVFN's "Trades" tab (probably requires registration). Especially for illiquid shares, the market can get into a state where for instance the best quotes from market makers are 110p/120p, which are therefore the LSE's official bid/offer prices, but the best selling deal available from an RSP is at 111p and the best buying deal at 114p. So small trades (which are often the only ones happening for a fairly illiquid share) are going through at 111p and 114p - and because they're all at prices below the mid price of 115p, the system ADVFN uses classifies them all as 'sells' (the official trade reports don't say whether they are a buy or a sell, for the very good reason that every trade is both a sell by one investor and a buy by another!). And so you get bulletin board comments about how much more selling there is than buying, what that means about the share's prospects, etc - all based on the false premise that the 'buys' vs 'sells' naïve computer-driven guesswork in the trades list has anything to do with reality!

So I don't regard that guesswork as having any real value at all. The actual trade reports in such lists can be useful, e.g. for spotting what might be available, but IMHO that guesswork has amusement value at best. For instance, if the share concerned happens to be a smallcap that I want to buy a large quantity of, seeing the sort of situation I've described above with deals clustered around two prices, both of which are below mid price, suggests that I might be able to buy at the higher of those prices (114p) rather than the offer price (120p) - a fairly significant 5% improvement. Also, the comparatively low level of the RSP prices suggests that small investors have been selling more to RSPs than they've been buying from them, so the RSPs might be fairly long on stock - all of which suggests that a large buy at a good price (assuming I'm right about the share, of course!) might be available from them... It isn't always, of course, but it is often enough that I've found it worth trying when I happen to encounter such a situation. And when it is, I can't help being amused when (as has sometimes happened) my large buy is reported as a 'sell' and results in yet more bulletin board comments, e.g. along the lines of "why isn't the price falling when there's so much selling going on???"...

Gengulphus