I am trying to apply a dollar amount to the "cost of buying on the offer and selling on the bid vs not getting filled bidding / offering" Below is an example... assume that there is no bias meaning at the given instance in time the market is just as likely to go up or down. Tell me what you think. (50)20.25 * 20.26(50) Say at this point in time there are no trades and there is equal amount bid and offered. I've tried to make all situations "ideal" So you could say that "the price" is 25.5 1. So if you buy and take the offer you'll get 26. So the "cost" is 25.5 - 26 or -.5 or -1/2 the spread 2. If you are bidding at .25 and are "first" in line among the 50 that are bid. A sell market comes and you are filled on the bid. Let's say for 100 shares Now we are at (49)20.25 * 20.26(50). So you could say the price is roughly 25.49, and the "cost" is 25.49 - 25 or .5. or 1/2 the spread 3. If you are bidding at .25 and are "last" in line among the 50 that are bid. Sell market orders are coming in eating at the 50 until finally you get filled. So now say we are at (50).24 * .25(50) after say 50 new offers come in at .25. You could say the price is now 24.5 and the "cost" is 24.5 - 25 or -1/2 the spread. So... 1) when you sell on the bid or buy on the ask that "cost" is - 1/2 * (the spread). 2) when you buy on the bid and sell on the ask (**assuming that you believe there is no bias either upward or downward**), that "cost" is a function of where you are in the line. If first the "cost" is actually a gain of 1/2 * the spread) and gradually decreases to -1/2(the spread) as you progress towards the end. Therefore... This "cost" maybe justified when conditions are such that in the exact instant there is either an upward bias or downward bias hence it might be worth it to buy on the offer or sell on the bid. However, sometimes I'm in a trade and just need to exit. There is no indication at that time of whether the bias is up or down hence there should be no justification of paying the premium of buying on the offer / selling on the bid. An order should be placed at limit, reducing your "cost' to either 1/2 to -1/2 If you are trying to buy on the bid / sell on the offer and at the instant your indicators tell you there is a bias either upward / downward. You might not get filled which is an opportunitiy cost "lost" which might be > the "cost"
It really depends on your strategy. When my TS decides to go along with an aggressive buyer/seller, it uses marketable limit orders +/- the reasonable spread. When it exits the position, it issues market orders only. You don't want to chase the market when the price moves against you. Time is money. I never understood that rebate business... There are some co-located algos that chase the market with limit orders (with cancel/replace), and then issue market orders after some time/price threshold, but that's different caliber...
Well if "price is moving against" you or you have another signal to get out that's another story... but say you don't get a signal that the market is moving against you, you have to assume 50/50. Take this scenario say you are long and you place a limit order right at the current ask, and adjust your ask price as the current ask moves. I would bet that if you do that 1000 times vs just hitting the bid... you'll end up with the same net result. The edge lies when you are able to have your limit order higher up in that queue... but that's just my thoughts and definely could be incorrect as I really haven't made any dinero... or for that matter have any real time experience trading
I the market is not moving against you, why do you need to exit? I'm not sure that you want to see your offer hitting just because someone decided withdrew his offer. As I said before, you need to have really fast DMA (both market feed and OMS), or to be co-located in order to chase the market with limit orders. You have to remember that big houses spend big bucks to have the right infrastructure in place (and have almost zero latency). You won't win in this battle, market is moving too fast these days, and big boy's algos will always be one step ahead of your TS when it comes to limit orders. Also, don't forget that some brokers charge the order cancellation fee, so cancel/replace approach may cost you some bucks...