Price-time priority

An electronic exchange receives thousands of orders a second. When several buyers want the same contract, somebody has to decide whose order is filled first. Price-time priority is that rule.

The workbook states that F&O platforms in India offer an order driven market, wherein orders match automatically on price time priority basis.

Two tests, in order:

1. Price first. The best price wins. For buy orders, best means highest. For sell orders, best means lowest.
2. Then time. Among orders at the same price, the one that arrived earlier is matched first.

So you cannot jump the queue by being quick with a worse price, and you cannot lose your place at a given price to someone who arrives after you.

The sequence inside the trading system (Chapter 6, section 6.1):

1. Every incoming order is time stamped.
2. It is immediately processed for a potential match.
3. If no match is found, it is stored in the relevant order book, sorted by best price, then within price by time.
4. The best buy order matches the best sell order. An order may match partially, producing multiple trades.

Why is the best buy the highest price and the best sell the lowest? The workbook explains that the system views all buy orders from the point of view of a seller, and all sell orders from the point of view of a buyer. A seller prefers the buyer offering most; a buyer prefers the seller asking least.

Order conditions interact with the queue: a limit order waits in the book at its price; a market order takes the best available opposite price; an IOC order takes what it can immediately and cancels the rest; a day order is cancelled automatically if not executed by the end of the day.

Illustrative order book. Prices, quantities and times are hypothetical.

Buy orders waiting in the book for a stock futures contract:

The sort order is B1, B2, B3. B3 arrived first of all, but at a worse price, so it goes last. B1 beats B2 at the same price because it came four seconds earlier.

At 10:02:00 a sell limit order for 2,000 at Rs 1,301.50 arrives. It can match any buy at 1,301.50 or better:

Match 1: 850 with B1 at 1,302.00      → B1 fully filled
Match 2: 1,150 with B2 at 1,302.00    → B2 partly filled (550 left)
Remaining sell quantity = 2,000 − 850 − 1,150 = 0

The incoming seller's order was fully executed in two trades, both at Rs 1,302 — better than its own limit of 1,301.50. B2 keeps its time priority for the remaining 550, and B3 is untouched despite having been first in the book.

Chapter 6, section 6.1 (Trading Mechanism), under Order Matching Rules, states that Indian F&O platforms are order-driven and match on price-time priority, and explains the best buy / best sell convention. The same section defines day, IOC, limit, market and stop-loss orders. Expect a question on the matching rule and one on which buy or sell order counts as "best".

• Price comes before time. An earlier order at a worse price waits behind a later order at a better price.
• Best buy = highest price; best sell = lowest price.
• Orders can match partially and produce multiple trades.
• Indian F&O markets are order driven, not quote driven, and electronic, not open outcry.
• Orders are time stamped on receipt and processed immediately; only unmatched orders are stored in the book.