Execution Price When Orders Cross
The term price cross is used to describe a specific relationship between a buy price and a sell price.
A price cross occurs when a buy price and a sell price overlap.
This happens when
the buy price is greater than or equal to the sell price
and equivalently when
the sell price is less than or equal to the buy price
This term does not describe prices moving or crossing over time. It refers to a static comparison of recorded prices.
In practice, this relationship arises when an incoming order is recorded at a price that overlaps with resting opposing orders (note plural orders).
In the previous lessons, execution occurred only when a new order met an existing order at the same price.
In this lesson, execution can occur when prices cross, even though the two orders are not priced identically.
To examine this case, a new resting order must first be recorded.
Case 1. Buy Order Crosses a Resting Ask
Stage 1.1 A Resting Ask Is Added
Event: At a seller submits an order to sell 6 apples at $10 each.
The new sell order is recorded in the asks ledger.
Stage 1.2 A Higher Buy Order Arrives
Event: At a buyer submits an order to buy 6 apples at $15 each.
A new buy order is recorded in the bids ledger.
The new buy price is
higher
than the latest ask price.
The orders overlap and can be matched.
The trade is executed.
Six apples are exchanged at $10 the price of the existing sell order, not the buyer’s limit:
- A - the ask @ $10 is removed.
- B - the bid @ $15 is removed.
- C - trade tape is updated with $10 entry, which now is the latest reported price.
The trade is executed at the ask price of $10 not the buy price of $15
Case 2. Sell Order Crosses a Resting Bid
The book continues from the current state.
Stage 2.1 A New Bid Is Added
Event: At a buyer submits an order to buy 3 apples at $16 each.
The order is recorded in the bids ledger.
No trade occurs yet.
Stage 2.2 A Lower Sell Order Arrives
Event: At a seller submits an order to sell 3 apples at $12
The order is recorded in the asks ledger.
The sell price is lower than the bid price.
The orders overlap and can be matched.
The trade is executed.
Three apples are exchanged at $16 because the sell order specifies a minimum price of $12 and the resting bid at $16 satisfies that condition:
- A - the ask removed.
- B - the bid removed.
- C - the latest price $16 entered at
The trade is executed at the resting bid price of $16 not the sell price of $12
What Determines the Execution Price
In the crossed-order cases shown in this lesson, the execution price is determined mechanically by which existing order is matched when a new order arrives.
In both cases shown here, one order was already recorded in the book when the other arrived.
When the new order crossed that existing order, execution occurred.
The trade was recorded at the price written on the specific order that was matched and consumed in that execution.
Although the incoming order specified a limit, the execution price was taken from the order already resting in the book.
It only permitted execution by overlapping an existing order.
Conclusion (After Both Cases)
Two trades were executed.
In both cases, a
price cross existed
between a newly arriving order and a resting opposing order.
Execution followed immediately, and each trade was recorded at the price of the resting order already present in the book.
No midpoint or averaging logic was used.
Each trade was recorded exactly at an existing book price.