Large BUY LIMIT orders' effect on a stock's price
Let's say a Nasdaq stock is trading at ...
Can a very large (outstanding) BUY LIMIT order at .00 pull the stock price down?
Is this a legal/common practice? (I've noticed this being done when reviewing Level II data)?
UPDATE
I see some interesting information. I guess I mis-attributed the cause of the price move..
Here is the full list of observations (since it could helpful)
low volume
market just closed
30 (x100 shares) SELL LIMIT orders @ .30
15 (x100 shares) BUY LIMIT orders @ .10
Actions that created a price drop:
10 (x100 shares) BUY LIMIT orders get moved down to .00
15 (x100 shares) SELL LIMIT orders immediately move down to .12 (before the next candle even forms)
Remaining 15 (x100 shares) SELL LIMIT orders also immediately move down to .22 (before the next candle forms)
Next candle shows a price drop to ~.12 (can't remember exact price)
10 (x100 shares) BUY LIMIT immediately moves up to sell at ~.12
(2)2 Comments
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Traders sometimes look at the depth of the book (number of outstanding limit orders) to try and gauge the sentiment of the market or otherwise use this information to formulate their strategy. If there was a large outstanding buy order at .50, there's a decent chance this could increase the price by influencing other traders.
However, a limit order at is like an amazon.com price of 0,000 for a book. It's so far away from realistic that it is ignored. People would think it is an error.
Submitting this type of order is perfectly legal. If the stock is extremely thinly traded, it might even be encouraged because if someone wanted to sell a bunch and did a really bad job of it, the price could conceivably fall that far and the limit order would be adding liquidity. I guess. Your example is pretty extreme.
It is not uncommon for there to be limit orders on the book that are not very close to the trading price. They just sit around. The majority of trades are done by algorithmic traders and institutional traders and they don't tend to do this, but a retail investor may choose to submit an order like that, just hoping against hope.
Also, buy orders are not likely to push prices down, no matter what their price is. A sell order, yes (even if it isn't executed).
If an offered price is below what people are willing to sell for, it is simply ignored.
(What happens if I offer to buy lots of cars as long as I only have to pay each? Same thing.)
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