Markets specify the order in which resting limit orders and/or dealer quotes execute against incoming market orders.A typical rule is to give first priority to orders with the best price and secondary priority to the order posted first at a given price.Most markets adhere to price priority,but many modify secondary priority rules to accommodate large transactions.Suppose there are two resting orders at a bid price of $40.Order one is for 2,000 shares and has time priority over order two,which is for 10,000 shares.A market may choose to allow an incoming market order for 10,000 shares to trade with resting order two rather than break up the order into multiple trades. Even price priority is sometimes difficult to maintain,particularly when different markets are involved.Suppose the seller of the 10,000 shares can only find a buyer for the entire amount at $39.90,and trades at that price.Such a trade would "trade-through"the $40 price of order one for 2,000 shares.Within a given market,such trade-throughs are normally prohibited-the resting limit order at $40 must trade before the trade at $39.90. In a dealer market,like Nasdaq,where each dealer can be viewed as a separate market,a dealer may not trade through the price of any limit order he holds,but he may trade through the price of a limit order held by another dealer.When there are many competing markets each with its own rules of precedence,there is no requirement that rules of precedence apply across markets.Price priority will tend to rule because market orders will seek out the best price,but time priority at each price need not be satisfied across markets. The working of rules of precedence is closely tied to the tick size,the minimum allowable price variation.As Harris(1991)first pointed out,time priority is meaningless if the tick size is very small.Suppose an investor places a limit order to buy 1000 shares at $40.If the tick size is $0.01,a dealer or another trader can step in front with a bid of 40.01-a total cost of only $10.On the other hand,the limit order faces the danger of being "picked off"should new information warrant a lower price.If the tick size were $0.10,the cost of stepping in front of the investor's limit order would be greater($100). The investor trades off the price of buying immediately at the current ask price,say $40.20,against giving up immediacy in the hope of getting a better price with the limit order at $40.By placing a limit order the investor supplies liquidity to the market.The 77 Markets specify the order in which resting limit orders and/or dealer quotes execute against incoming market orders. A typical rule is to give first priority to orders with the best price and secondary priority to the order posted first at a given price. Most markets adhere to price priority, but many modify secondary priority rules to accommodate large transactions. Suppose there are two resting orders at a bid price of $40. Order one is for 2,000 shares and has time priority over order two, which is for 10,000 shares. A market may choose to allow an incoming market order for 10,000 shares to trade with resting order two rather than break up the order into multiple trades. Even price priority is sometimes difficult to maintain, particularly when different markets are involved. Suppose the seller of the 10,000 shares can only find a buyer for the entire amount at $39.90, and trades at that price. Such a trade would “trade-through” the $40 price of order one for 2,000 shares. Within a given market, such trade-throughs are normally prohibited – the resting limit order at $40 must trade before the trade at $39.90. In a dealer market, like Nasdaq, where each dealer can be viewed as a separate market, a dealer may not trade through the price of any limit order he holds, but he may trade through the price of a limit order held by another dealer. When there are many competing markets each with its own rules of precedence, there is no requirement that rules of precedence apply across markets. Price priority will tend to rule because market orders will seek out the best price, but time priority at each price need not be satisfied across markets. The working of rules of precedence is closely tied to the tick size, the minimum allowable price variation. As Harris (1991) first pointed out, time priority is meaningless if the tick size is very small. Suppose an investor places a limit order to buy 1000 shares at $40. If the tick size is $0.01, a dealer or another trader can step in front with a bid of 40.01 – a total cost of only $10. On the other hand, the limit order faces the danger of being “picked off” should new information warrant a lower price. If the tick size were $0.10, the cost of stepping in front of the investor’s limit order would be greater ($100). The investor trades off the price of buying immediately at the current ask price, say $40.20, against giving up immediacy in the hope of getting a better price with the limit order at $40. By placing a limit order the investor supplies liquidity to the market. The