Why do price improvements happen?

Discussion in 'Trading' started by bidask, Jul 10, 2008.

  1. bidask


    I submitted a limit order to narrow the bid-ask spread and I actually got a price improvement!

    Why does this happen?
  2. Lucrum


    P F M ?
  3. bidask


    what is pfm?
  4. Several reasons could apply. First, there may have been a better price on another market center (ECN, etc), between the NBBO (National Best Bid or Offer), which requires the orignal market destination to forward to the better price destination. This is due to the NMS (National Market System) rules.

    Also, there are "hidden pools of liquidity" out there that are ofter priced between displayed bids and offers. Major firms have millions of shares offered and bid for in these pools. You can learn a bit more about that here: http://www.redi.com/forms/algo720.pdf

    Another way is to send an order at a certain price and there to be an immediate better order come in where they fill your order.

    Sometimes there are what we used to call "iceburg" orders where the actual share size is not displayed. And, we can have orders in that we simply do not want displayed.

    These are the primary reasons for price improvement on limit orders.

    Hope this helps,

  5. Its either a mistake or you have a secret admirer.
  6. You forgot to mention LRPs.
  7. Yes, liquidity replenishment points, pretty rare (moving price targets), but happens once in a while.