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High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

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Chapter 6. Orders, Traders, and Their Applicability to High-Frequency Trading

High-frequency trading aims to identify and arbitrage temporary market inefficiencies that are created by the competing interests of market participants. Understanding the types of orders that traders can place to achieve their goals allows insights into the strategies of various traders. Ultimately, this understanding can inform the forecasting of impending actions of market participants, which itself is key to success in high-frequency trading. This chapter examines various types of orders present in today's markets.

ORDER TYPES

Contemporary exchanges and electronic communication networks (ECNs) offer a vast diversity of ordering capabilities. The order types differ as to execution price, timing, size, and even disclosure specifications. This section considers each order characteristic in detail.

Order Price Specifications

Market Orders versus Limit Orders

Orders can be executed at the best available price or at a specified price. Orders to buy or sell a security at the best available price when the order is placed are known as market orders. Orders to buy or sell a security at a particular price are known as limit orders.

When a market order arrives at an exchange or an ECN, the order is immediately matched with the best available opposite order or several best orders, depending on the size of the arriving order. For example, if a market order to sell 100,000 shares of SPY arrives at an exchange, and the ...

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