NASDAQ Stock Orders
Stocks that are not listed on a traditional exchange but trade
via the NASDAQ system are handled with a very different
mechanism. There is no centralized exchange, but there is a
system of competing market makers who post quotes on NASDAQ
stocks. The spreads between the bid and ask prices tend to be
much larger for NASDAQ stocks than for comparable
exchange-listed stocks, and the number of shares that the
dealers quote are usually not representative of their
willingness to trade. As with exchange-listed stocks, your
broker can tell you what the best quotes are at any moment. If
you place a market order, you will probably get the order filled
at the current bid or ask quote. Limit orders on NASDAQ are
handled very differently from limit orders on the NYSE or Amex.
Most likely, your limit order will stay with your brokerage firm
and only be executed if the market makers' quotes change to meet
your order. For example, suppose that you are interested in
purchasing a NASDAQ-traded stock whose best displayed quotes are
a bid of $8 and an offer of $8.75. If you place a limit buy
order at $8.25, your order probably will not be filled until one
of the market makers decreases their ask quote from $8.75 to
$8.25. Your broker is under no obligation to show your order
outside the firm. Many of the larger brokerage firms maintain
their own internal limit order books, but there is no formal
limit order book like the ones the exchanges maintain for
exchange-listed stocks. Thus, your order to purchase at $8.25
may go unfilled even if there is an order at another brokerage
firm to sell at $8.25. Unlike the NYSE, the market makers may
trade ahead of your limit order even if you placed your order
first. It is also important to think about what might happen if
your limit order is not filled within a reasonable amount of
time, and you still want to trade the stock. If you think that
the stock is going to make a major move, then it may move before
your limit order gets filled. On the other hand, if you are not
expecting the stock to go anywhere soon, it may not run away
from you. If you really want to get the trade done, you need to
consider this risk that the stock may run away from you.
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