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I've read all the explanations online. Use market to fill quick, regardless of price. But... How that is that different from a sell limit of 0 or a buy limit of infinity? (Right, in practice things can't so far without halting but the general idea stands.)

Why world anyone take the (albeit minuscule) risk of a market order (aka no limit limit order)? What's the point? Why not simply use limit orders, set to, say 10% or 20% of current? Do they execute differently in most cases where the prices don't take huge jumps quickly?

What am I missing? I've heard some users are charged less for a market order. Is that still true and causing this technically unneeded order type to be available and encouraged to all?

5

What you are saying is a very valid concern. After the flash crash many institutions in the US replaced "true market orders" (where tag 40=1 and has no price) with deep in the money limit orders under the hood, after the CFTC-SEC joint advisory commission raised concerns about the use of market orders in the case of large HFT traders, and concerns on the lack of liquidity that caused market orders that found no limit orders to execute on the other side of the trade, driving the prices of blue chip stocks into the pennies.

We also applaud the CFTC requesting comment regarding whether it is appropriate to restrict large order execution design that results in disruptive trading. In particular, we believe there are questions whether it is ever appropriate to permit large order algorithms that employ unlimited use of market orders or that permit executions at prices which are a dramatic percentage below the present market price without a pause for human review

So although you still see a market order on the front end, it is transformed to a very aggressive limit in the back end. However, doing this change manually, by selling at price 0 or buying at 9999 may backfire since it may trigger fat finger checks and prevent your order from reaching the market. For example BATS Exchange rejects orders that are priced too aggressively and don't comply with the range of valid prices. If you want your trade to execute right now and you are willing to take slippage in order to get fast execution, sending a market order is still the best alternative.

4
  • Fantastic. So I'm not incoherent. What resources can I read to get general understanding on things like these? Most market related books simply don't go into this level of detail. I've started "Trading and Exchange: Market Microstructure for Practitioners" and it seems like it'll get into such reasoning but any recommendations are appreciated.
    – Dylan
    Oct 20 '15 at 21:15
  • Try Ernie Chang's book on Quant trading. It dedicates a few pages to slippage and order execution quality. amazon.com/Quantitative-Trading-Build-Algorithmic-Business/dp/…
    – PabTorre
    Oct 20 '15 at 22:32
  • 1
    This is not true of all exchanges, as market orders are still used in most exchanges around the world, and it does not answer the question of "why ever use a market order?"
    – user9722
    Oct 21 '15 at 20:20
  • good observations George, I updated my answer to address those points a little better.
    – PabTorre
    Oct 22 '15 at 3:09
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The purpose of a market order is to guarantee that your order gets filled. If you try to place a limit order at the bid or ask, by the time you enter your order the price might have moved and you might need to keep amending your limit order in order to buy or sell, and as such you start chasing the market. A market order will guarantee your order gets executed.

Also, an important point to consider, is that market orders are often used in combination with other orders such as conditional orders. For example if you have a stop loss (conditional order) set at say 10% below your buy price, you might want to use a market order to make sure your order gets executed if the price drops 10% and your stop loss gets triggered, making sure that you get out of the stock instead of being stuck with a limit order 10% below your buy price whilst the stock keeps falling further.

6
  • Well I used 10% as an example cause I thought there were circuit breakers or such to limit how much a price can move. What happens if there are not enough v shares offered to fill a market order?
    – Dylan
    Oct 20 '15 at 17:00
  • You mean if someone puts in a market order to buy 1,000,000 shares and there are only 500,000 shares out for sale at the moment? The price goes up till someone else decides to sell. Everyone/everything has a price ;)
    – Ross
    Oct 20 '15 at 19:20
  • I meant what actually happens if the order book doesn't have enough shares. Does the market order just partially fill and exit? Or does it sit around somehow and wait for any other order to come in?
    – Dylan
    Oct 20 '15 at 22:23
  • 2
    @Dylan - you can have a 'Fill or Kill' order which will cancel the rest of your market order that is not filled immediately or you can set a 'Day Only' order for any part of the order not fill by the end of the day to be canceled, or else the remainder of any unfilled part of your market order will usually be placed at the top of the order list. You should check with your broker about this as methods might differ between countries and brokers.
    – Victor
    Oct 20 '15 at 23:39
  • 2
    @Dylan - you have also got to realise that if you try to place a limit order to far away from current activity that your order may not be accepted, check with the exchange what their requirements are.
    – Victor
    Oct 21 '15 at 3:05
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I think it all boils down to which is your priority.

  1. if it's a limit order
    • you are being guaranteed that you will never pay more than this amount
    • but you are not guaranteed of getting the stock
  2. if it's a market order
    • you are being guaranteed (well, in a way) of getting the stock
    • but u are not guaranteed of getting it at the ask price

So it all depends.
People that want the stock sooOoooo badly will definitely go for the market order.

2
  • But is wanting a stock "sooOoooo" badly something an investor or trader ever do? If it's trading at $20, what's the harm in putting in a bid at $40? "Wanting" a stock sounds like an emotional reaction and doesn't seem like something that should be reflected in the design of an exchange.
    – Dylan
    Oct 20 '15 at 17:04
  • 4
    @Dylan What if you're just trying to get out of a position? That might mean selling your shares, or it might mean buying shares to pay back your short.
    – user27684
    Oct 22 '15 at 3:54
2

The original poster's concern is valid. Sometimes, market orders do get executed at seemingly ridiculous prices.

In addition to Victor's reasons for using a market order, sometimes a seller does not care how low the price is. For example, after a company goes broke, its stock continues to trade for a while. This allows shareholders to realize their losses for tax purposes, and allows short-sellers to close out their positions. A shareholder who is trying to realize a 10 dollar per share loss for tax purposes probably does not care whether he gets 10 cents per share or 0.001 cents per share, so a sell-at-market order makes sense.

1
  • So is a sell market order totally equivalent to a sell limit of $0? Under what circumstances would they be different? (Or are they always, in terms of how they're regulated or executed?)
    – Dylan
    Oct 20 '15 at 17:05
1

I don't think you're missing anything. Many modern trading systems actually warn you when trying to enter a market order, asking if you are sure that you wouldn't prefer to set a limit. I fully agree with you that it is usually just better to define a limit even 20% higher than just doing a market trade.

Let me give you some examples when you still might prefer to use a market order instead of a limit:

  • In a highly liquid market with very small spreads, for example blue chips on NYSE. Unless you want to rule out your own typing mistake, a limit order won't give you any benefits.
  • As Victor already said, when you really want to fill an order no matter the price. For example, you just want to sell your share when the market opens, even if the price will be a lot lower than the last closing.

But even in those two examples a (wide) limit order might just be the safer thing to do.

So, what it really comes down to is speed: A market order has no other criterias to be defined, is thus entered faster and saves you a few seconds that might be crucial.

4
  • 1
    I'll add that market orders near the open and close can be particularly volatile, hence why the wide limit might be safer. Oct 20 '15 at 13:15
  • Do they actually execute differently? Even in the NYSE example, it could still move though, right? Like if an order is placed the exact moment some financials are released?
    – Dylan
    Oct 20 '15 at 17:02
  • A) No, they execute the same, market orders are not favoured in this sense. B) Sure, the market could move in this scenario, heavily. But we're speaking about a super liquid market where 1000s of orders are filled in just one second. So you would literally have to catch the microsecond the bad news gets through to the market to profit from the limit order "saving" you. So there really is no relevant difference to market orders.
    – vic
    Oct 20 '15 at 20:25
  • It's different overnight. Say you decide in the evening u want to buy a certain share, and you enter the order at market. Usually u'll be fine with blue chips. But if some news, good or bad, hits during the night, the opening price can be way off of the last closing. That's why you will rarely choose market orders at closed exchanges.
    – vic
    Oct 20 '15 at 20:29

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