Bid-Ask at market open, which comes first?
I am trying to get a grasp on how the bid-ask match maker works, in particular for options as there is less volume and fewer market orders. Lets say I own an option, and place a limit sell order for .00 overnight. Now, overnight something happens which causes the stock to pop, and for whatever reason other traders don't see my sell order for .00 and place bids at .00 pre-market open. Now at market open for an instant there is a bid-ask spread of - . My question is, which takes priority? Is it based on the time the order was placed, even when the market is closed?
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When you place a limit sell order of .00 (for a stock on an option) you are adding your order to the book.
For example, here is the order book for AAPL finance.yahoo.com/q/ecn?s=AAPL+Order+Book
Anyone who places a buy at-the-market or with a limit price over .00 will have that order immediately fulfilled through the offer you have placed on the book.
On the other hand, if that other person places a buy for .00, then the spread will now be ".00 bid, .00 ask".
Priority is based on first the price (all .99 asks will clear before .00) and within each bucket this is based on the time your order was submitted.
This is why in bidding markets (including eBay) buying at $x.01 is way better than $x.00 and selling at $x.99 is better than $(x+1).00.
Source: en.wikipedia.org/wiki/Order_(exchange) under "first-come-first-served"
The options market requires much more attention to avoid the situation you're describing.
An overnight ask will remain on the books most likely as Good-Til-Canceled. The first to bid the low order gets it. If traders are paying attention, which they probably are then they will bid at . If not, they will bid immediately at .
If they crossed the order, it would be filled at their higher than bid.
This is all governed by the exchange where the ask is posted, and most implement price-time priority.
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