Are you asking to get screwed with a limit order above the mkt?

This question is about how the CME matching engine works.

We are currently submitting limit orders and we get filled at our limit price 80% of the time with the remaining 20% of orders being missed (this statistic is based on nearly 1/2 million orders over the last 3 years). To increase our fill percentage, I could use a limit price that is slightly above the current market: so, example, mkt is at 100, and I place a buy limit of 110. I'm assuming that if there are no offers on the order book for 100, I would be filled at the best price first, say 101, with a maximum allowable price of 110. Right?

Here is an example of my question. Let's say these are the offers on the CME order book:

100,101,101,102,105,110,110,110,110,110,110.

Now, let's say that I place an order to Buy 6 @ 110 LIMIT. I'm assuming that I would be filled 1 @ 100, 2 @ 101, 1 @ 102, 1 @ 105, and 1 @ 110. I'm also assuming that I would NOT be filled at 6 @ 110 (If that is the case, then I'm asking to get screwed).

Thanks,
Greg

 

Correct

 

What is the bid and ask sizes in the example? Usually if there is liquidity, you can just hit the ask (bid) for a Buy (sell) and fill. Also there is the issue of who is in line before you on the LMT and MKT orders. MKT jumps ahead of LMTs. That is why some tactics call for MKT, while others call for LMTs. Furthermore, there is usually not an issue for a retail trader unless there is not liquidity for their target size. Hope that helps.

 

How do you place a buy limit to enter a position above the current ask? Isn't that considered an invalid order?

 

No, such a limit is fine and probably a good idea from the perspective of safety (e.g. against melt-ups), though such safety matters less in liquid markets. If you replace "limit" with "stop" in your statement, however, then you are correct that it would be invalid.

 

It's called a 'marketable limit order' and is an equivalent to a market order as long as it crosses.

Yes, if the book remains static, you will get a pro-rated fill upon sweeping the book like you're suggesting. I.e. even if your marketable limit is through the current touch, you would get filled based on the resting order matched against it.

Of course, in the real world of UHF market makers, you very likely to get fucked. I.e. the moment you get matched against the touch (or the first 2 levels at most), the fast guys sitting away (who are likely just squatting there to hold on to the queue position and are very fickle) will cancel. In that situation it's likely that you hit an air pocket and a big chunk of your order will get filled against your limit.

You have various options, from going with a smart execution provider (PM me if you want to discuss - I don't want to appear as if I am pushing someones services) to trying to build something of your own (very tricky, as bad design is going to cost you). Do you find that you get negatively selected on both/either fills and/or misses?

 

So it is a stop market order? (or stop limit, if you want a fixed entry.)

I never use those, but see them in my toolbox.

 

Not really. A stop order (of any kind, limit or market) adds a condition that you hit a specific price level before your order becomes live. A marketable limit order is simply a limit order where the limit price is equal or though the current touch level (e.g. marketable limit buy is one where your limit price is above the current offer). If the market moves away from you or you get a partial fill at your limit, your marketable limit order (or the remaining size) becomes a resting order in the book.

 

Well, here is what it looks like on my screen. Current price is at like 11660 or some thing. If I want to place a buy order way above the current ask, I'd have to place a buystop order. So the trigger would be a stop. Either a market or limit order.

 

Not sure if we are talking about the same thing then. Imagine that we have a security ABC trading at 100 @ 101. When Alice places a stop buy at 105, she expects the broker/exchange to place a market or a limit order only when the security reaches 105 but not before. When Bob places a marketable limit bid for 105 (i.e. limit price through the current offer), he expects to get filled instantly (and go home to get a blowjob from Alice).