So far in this series, we have covered the order book, and we have shown some examples of orders executing against the order book. When we submit an order to the marketplace, the order is either matched with an existing order on the book or posted to the book.
The GDAX order matching engine does this work for us. If GDAX finds a matching order, GDAX will take this order from the book. In this scenario, we are deemed takers, and this is because an existing order was taken from the book to fill our order. When two orders are matched, we have a trade.
If the GDAX matching engine cannot find a match on the book, no trade occurs, and the engine will post our order to the book. This place on the book depends on our limit price. After our order is posted to the book, it must sit and wait for a taker looking for a match. This matching process is how trading works. The matching engine matches makers with takers.
Thus far, we have some exposer to the various order types and how they are matched when submitted. Now, we are going to take a closer look at these order types and their parameters. There will be some overlap in the next couple of videos. However, repetition is good for learning. This time, we will look at each order type, and we will show how the order will behave when submitted. We will do this for all possible order configurations. This approach is both academic and practical. The academic part will be our consideration of all possible order configurations. The practical part will be actually executing these orders against a live book on GDAX.
Each order type has a specific set of parameters. These parameters can vary causing orders to behave differently when submitted.
What I have here to showcase the order types and their variations is this spreadsheet:
The first column is the order type column. These are the same types that we have already touched on. What I want you to notice is that each type has a different number of configurations. Each row is a specific configuration. This allows us to see why the stop order is so complicated. There are many possible configurations. Sixteen in fact.
The next columns show the parameters that affect the behavior of the order.
We have following:
- The side of the order. (buy side or sell side)
- The limit price location on the book (bid side or ask side)
- The stop price location on the book. (bid side or ask side)
- The stop price compared to the limit price. (higher or lower)
For each of these parameters, there are exactly two possibilities.
Looking at the market order type, we can see two variations:
- A buy side order.
- A sell side order.
These are the only two variations, and this is because the market order only has one parameter that can affect its behavior.
We have x values for the other parameters because they are not applicable for market orders.
Since limit orders don’t have stop prices, we see x’s in the stop price column, and since plain stop orders don’t have limit prices, we see x’s in the limit price column. Since stop limit orders have a stop price and a limit price, we need to also consider how these two parameters are related. Is the stop price higher or lower than the limit price. I want you to notice how the number of possible configurations goes up as the number of parameters goes up. We can see this by looking at the larger number of configurations for the stop limit order.
We are going to discuss each of these order types and configurations and show what happens when we place each order on the GDAX exchange in a live session. Our task is show for each configuration whether the row is a maker or taker. This will give us full knowledge of what fees to expect when submitting orders on GDAX.
I have said that part of this exercise is academic, and this is because we will be considering all possible configurations even though some will never be used in practice. This is because some of the configurations simply aren’t practical even though they are possible. Our last column will track this for each row.