On the face of it, it seems like firing off a market order in an illiquid stock would be suicide. I am surprised by your comment. How much price improvement do you normally see?
You would think so but when trading with etrade or IB u have to remember that every time u use a market order you are using their inventory. So basically your execution happens in a dark pool, their own dark pool of internalized liquidity. Nobody else participates in this trade from the lit markets. So if the stock is 6 bid by 6.10 and there is only 1k on offer and I put a market order to buy 5k shares I might get the whole fill at 6.079999. IB has a mid point smart order now where I might be able to get the whole print off in between the spread. At worst maybe half between spread and rest at 6.0999. Either way price improvement. Lets say I use my takion platform same offer for 1k shares at 6.10 I put a market order in for 5k shares I might get 1k at 6.10 and rest between 6.12 and 6.16. This is because the hft guys can see your market order coming in and run u up on your execution. The hft guys have no impact on internalized order flow.
Just to clarify, will you gain access to the internalized liquidity when you submit a limit order (rather than a market order)? Is there a way to submit an order on Interactive Brokers where it will only search for internalized liquidity or dark pool liquidity (and not interact with the lit market)?
no a limit order is a limit order that posts to the market, now you can post bids and offers in the dark with IB but if you have real orders that you need to post when adding liquidity you might as well let everybody see it in the lit market. the main advantage of the internalized liquidity is when you need to take liquidity, as well as not get into the hft games. We all now trying to add liquidity gets harder and harder in the new environment so I usually take liquidity on an 80-20 percentage.
What if I send in a marketable limit order? Do I participate in the internalized liquidity as I would with a market order?
thats a good question, I have never tried that with a marketable limit order only straight market orders. Will try that with a couple test orders