I've been and investor for quite a while, a trader for a short time. I have found that MARKET executions with my current broker (Scottrade) take a long time to execute, and have been using LIMIT orders for faster fills. I incorrectly thought that a LIMIT would become a MARKET order once hit (which I believe is actually a STOP), and have been placing orders well outside of current bid/ask. Example, stock x trading at 8.6 by 8.65, I place a buy order at 8.8 to ensure a fill in case the stock, which is usually moving fast does not get away. What I have found is that the broker is giving me fills at or near MARKET, lower than my LIMIT in this case. So my question is this... Have I been getting lucky that the MM or SPEC is not pocketing the difference between my limit and current inside, and should I be using STOP orders? If so, do STOPS get the same fast execution as the LIMIT? Or, is this good practice for a fast fill, and though I may not get the optimum price possibly slipped by a penny or two? Thanks in advance.
I do it that way sometimes because my trading is not penny-dependent and I want to give the spec some room to work. When the market is 8 x 8.25 and you place a BUY LIMIT at 8.5, just for example - you are saying I want the stock at 8.5 or better. Placing the buy limit above the market makes it immediately executable. Whether you get price improvement or not depends on a number of factors, one important one being liquidity. Placing a buy limit above the market in a thinly traded stock will likely result in a fill at your limit. In a stock with good volume and thus greater liquidity, ie, the spec has a greater opportunity to match the trade vs take the other side, you will likely see price improvement and a fill at the market.
Inandlong's explanation is good, but if I were you I would get a broker that gives you immediate confirms. Why should you give away money by using a limit way off the market? If your market limit is not filled, then you cna move it. If you are not familiar with trading, you probably should stay away from overly thin stocks anyway. Personally, it's always irritated me that the stock brokers make no effort to educate theri customers in order terminology. I guess they want to encourage everyone to go market so they can pocket the spread. A buy stop is always placed above the market and becomes a market order when the stop price is hit. You are not guaranteed any particular price. A buy limit is normally placed at or below the market. You are guaranteed to pay no worse than your limit price but youare not guaranteed a fill. You can also use a stop limit, which becomes a limit order when the stop price is hit.
8hcap- i had the same experience back in the day when i had datek. market orders were always slower than limits. i dunno why; probably has to do with ECN vs SOES/nite/etc. routing. ECN's only take limit orders, so if your limit orders are always sent to an ECN, that would explain the instant fills.
I think you should always use a limit order. Placing it above the market when buying and below the market when selling insures you will get "market-like" orders which are actually filled much faster. Many people think a market order is the fastest way to get a fill, it's not true. Market orders are often held to see where the best place to fill them is at. This certainly is not the best place for you. Limit orders that improve the market must either be displayed or filled within 90 sec. There is not time limitation on how fast market orders should be filled, thus you often get screwed. Many people also think that if I put my limit in above or below the market then they will simply fill me at my limit price since thats what I asked for, also not true(most of the time). You can only be filled within the inside market within 90 secs of placing your order. If you place a limit that is 50 cents above or below the market and you get filled there, then I assure you that a market order would have given you a slower fill at possibly a worse price.
From what I gather here, LIMITS are safe and can aid speed in a liquid stock. Thin stocks and you just might get stuck with a limit buy or sell which is outside of current bid/ask. I still wonder if a STOP used the same way would have the same execution speed. I'm guessing that it may not since it will be converted to a MARKET order and placed in line. BTW, great site here for learning trading ins and outs.
Even on an illiquid stock you should not get filled outside the bid and ask price. However, if you are wanting to buy or sell more shares than is quoted at the bid or ask then you may very well move the market up or down by an unforseen amount. L2 quotes can help you see what the worst case senario may be on nasdaq stocks. One thing to remember though is that you probablly would not get a better fill with a market order in these types of stock either.