I am designing an automated strategy, just wondering advice on order entry. I am attempting to get into trending stocks, some are liquid, some are illiquid. Should I go with a limit order or am I just wasting time with limits and should use a market? Position size will not be that large, at first. Also is there a formula that might advise me on the amount of slippage that I could expect?
Market orders have no place in today's equity market structure. Trade market orders enough, and you'll eventually get filled at .0001 or 199,999.99 (on the wrong side), and you'll be looking at catastrophic losses unless you can get the trade busted. IMO, you should always put in a limit, even if it's significantly away from the current bid/ask.
OP do not ever use market orders. Either use non-marketable limits or marketable limits. Another way to put it is actionable or non-actionable limit orders. Meaning if you want a fill you "pay through" and use price improvement to your advantage rather than let your market order be held up and get a bad fill (for equities).
since your criteria is "trending", you are using a "lagging" automation technique. If your ATS output is late to arrive, then you can use an order that will fill sooner. All limit orders, changeto market orders and get at the end of the market order list as a FIFO arrangement. It looks like you are getting advice from people who do not believe in their trading systems and rules. I limit my stock positions to 100K shares and I always have a series of partial fills going in and going out. The ratio of partials is about 20 to 30. They are never all at the same price. the elapsed time on an exit can be as much as 4 hours since it is not a good idea to have slippage on orders. I never deal with placing orders larger than the blocks being traded at a given time of day. Think it through.
Are you suggesting changing limit orders over to market orders? Also, are you suggesting that market orders fill sooner than marketable limit orders?
Harris explains the operating rules for markets in detail. I spoke in generalities for using an ATS to make money. Personally, I use market orders and if the capacity of the market at a given time is less than 5 times the capacity at the time of my entry, then I put in partial fill orders. That is a break my trade into pieces which in teurn eat up the orders showing on data menus. If a person reates a sucessful ATS, then he has to deal with the trading platform (dashboard adjustments) to use the ATS interactively with the market's operation. Transactions in markets usually involve a market order on one side or the other. This shows up on a OTR chart as you see the color of the bar switch to bid or switch to offer. Often there are pairs of OTR bars with one common price. Here three separate tick values are in play. In trading, order adds and deletes ALWAYS EXCEED the transactions in the market. An ATS, to be most fficient, needs to be able to "fast track" trade to circumvent "standing in line" at a given value level. Market orders go to the head of any value level. The OP is planning to have an ATS. Since he is working on its "participating" in the market, he has to decide on its ability to either add and dlete orders OR do transactions at the better event when the event arrives. The type of order facilites each of these separate types of goals. (Goggle "games played on the DOM"). For my ATS's, my goal is to "execute" to take the full offer of the market segment by segment. In other words, I extract capital all the time during RTH. I am not competing for scarce money; all I do is take the market's full offer. I read Harris to understand how markets handle different types of orders. I manage to get at the front of the line at the correct event.
Which means, I assume, that you will be buying into strength. Using a market order in that case, you might as well walk around with a sign on your back saying "KICK ME."
Jack, No idea what securities you are trading but in the equity world market orders are allowed to be held up for a period of time prior to acting on them. The market maker can sit on your market order, pull prices and then fill you at a (better for them, worse for you) different price. If you read what I wrote you will see that I said MARKETABLE limit order. Pay through. If the stock is trading at 10.49 x 10.51 and you are trying to buy you send an order in to purcahse at $11. In the equity world you will get price improvement and you are required to be filled at the NBO vs. just a market order. Market orders can be held long enough that the market can pull the bid/ask back to a lower/higher price and fill you at $10.59 for example. If you had sent your order in to purchase at $11.00 you would have received price improvement down to the NBO and have been filled at $10.51. Sending marketable limit orders is always going to be better (and will legitamitley get you filled faster) than a general market order. If you aren't trading equities there is no reg nms so it's a moot point.