Bid and Ask Orders

When orders are sent to the exchange, they have specific characteristics.

• Bid: Buy price
• Ask (Offer): Sell price
• Bid-ask spread: Difference between best bid and best ask. Narrow spreads mean higher liquidity, wide spreads indicate less liquidity.

Bid-ask spread example: If the best bid is $38.43 and the best ask is $38.45, the spread is $0.02. Another example: a best bid of $61.85 and best ask of $62.45 means a $0.60 spread.

Order Types and Instructions

• Make market: Placing a new aggressive bid/ask to set a new price level.
• Behind the market: Orders away from the current best price, unlikely to execute unless price moves.
• Standing limit orders: Waiting to be executed at specific prices.

Execution Instructions

• Market order: Executes immediately at the best available price (buy market order matches the lowest ask).
• Limit order: Specifies the maximum buy or minimum sell price; executes only at the limit or better.
• Marketable limit order: Aggressively priced limit order that behaves like a market order.
• All or nothing (AON): Executes fully or not at all.
• Minimum fill: Sets a minimum size for execution; cancels if not met.

Validity Instructions

• Day order: Valid only for the trading day.
• Good till cancel (GTC): Remains until manually canceled.
• Immediate or cancel (IOC): Executes immediately or cancels unfilled part.
• Good on open/close: Executes at the market's open or close auction.

Stop Orders

• Sell stop: For long positions, triggers a sale if price falls to a set level.
• Buy stop: For short positions, triggers a purchase to cover if price rises to a set level.

Hidden and Iceberg Orders

• Hidden order: Not visible to the public order book.
• Iceberg order: Only part is visible, the rest is hidden to mask large trading intent.

Clearing Instructions

Clearing instructions specify how and where trades are settled, mainly relevant for institutional trading but less for retail investors.

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Well-Functioning Financial Systems

• Complete markets: All asset types and contracts are available to solve financial needs.
• Operational efficiency: Low transaction costs (commissions, spreads, price impacts).
• Informational efficiency: Prices fully reflect available information.

These elements together keep financial systems efficient and effective.