Say the bid ask in one scenario is 100/101 and in another scenario it is 90/98 ( hypothetical, for the same stock ). I want to hit a market buy order. In the second case ask is lower ( 98 ) but the bid ask spread is quite wide. In the first case ask is higher but bid ask spread is lower. Why would I take bid ask spread into consideration while hitting market order ? Why not only the absolute ask ? What am I missing ?
1 Answer
Because in the case for 100/101, if you wanted to placed a limit buy order at top of the bid list you would place it at 101 and get filled straight away. If placing a limit buy order at the top of 91 (for 90/98) you would not get filled but just be placed at the top of the list. You might get filled at a lower price if an ask comes in matching your bid, however you might never get filled.
In regards to market orders, with the 100/101 being more liquid, if your market order is larger than the orders at 101, then the remainder of your order should still get filled at only a slightly higher price.
In regards to market orders with the 90/98, being less liquid, it is likely that only part of your order gets filled, and any remained either doesn't get filled or gets filled at a much higher price.
