Order Book Dynamics and Price Formation
Walk through the mechanics of a limit order book.
1. What is the difference between a passive (limit) order and an active (market) order? How does each interact with the order book?
2. Explain how price-time priority works. If two limit orders rest at the same price, which one gets filled first?
3. Suppose the order book shows bids at $\
00.00$ (500 shares), $\$99.99$ (300 shares) and asks at $\
00.02$ (200 shares), $\
00.03$ (400 shares). A market buy order for 350 shares arrives. Walk through exactly what happens -- which resting orders get filled, what is the resulting book state, and what is the new mid-price?
4. Distinguish between temporary and permanent price impact. Why does the distinction matter for someone executing a large order?
Open the full interactive solver, hints, and worked solution →