Forgive me if this question is naive. From what I understand about market orders, they are filled at the best available market price, and thus jump in front of limit orders in the same direction. This is all well and good in a market with high liquidity (ie when there's sure to be lots of competing orders) but what about the scenario where, at market open, Bob sends in a bid for 10 shares of asset1 where Paul sends in an ask for 10 shares of asset1? Is there some kind of pricing information that is saved from day to day by the market? To be specific, I think this scenario would only take place in an order-driven market without a market maker. In the case of an exchange with a market maker, how are problems like this one at market open accounted for? Does the MM save the last ask and bid price at which an order has been filled, and start the process at these prices for the next market day?
It's supply and demand. Without any pricing information, there is no "market price" or at best it's whatever the other side is willing to pay, say $0.01. If in doubt, think of yourself as a tomato seller at a farmer's market. If there are no tomatoes for sale and you yell out "tomatoes for market price", what would the price be? Equity markets open with opening auctions. So orders received before open are collated and a price is determined based on supply and demand. After this period, you don't want to enter any marketable orders because the spread is wide. Slowly the spread will narrow as more participants join. I suggest you read about the flash crash when MMs withdrew from the marketplace and PG dropped to $0.01 at one point.
Would you place a market order in any market with a very large bid ask spread. No you would not, you would place a limit order somewhere inside the spread instead. Nor would anyone else, unless they really really have to.
You're right, I guess my question is more what happens if a market order is placed without a bid ask spread already established by its participants (ie at market open). Is there a market maker that creates this spread at the beginning of the day to address that?
There are market makers in most markets. There are also resting overnight limit orders from other traders. As well as opening limit orders. Unless its really low volume dead market, or there is an extreme event, there will be some bid and offers. With a market order you want to look at the market depth first, otherwise you risk getting a bad fill.
If you have crappy routing broker the MM's will take advantage and give you terrible fill. I use tradezero and put a stop-market on a ticker and it stopped me below the bid by 10%.
%% LOL On liquid stuff it seldom makes a difference. I like a generous limit/odd/strange I never have gotten a rotten/bad fill but could. Farmers markets tend to have good prices/ I grow some of my tomatoes/so price improvement to the max/LOL I've seen tomatoes so high in the store,a wife told her husband ''take those back/redund/LOL'' Market orders tend to be quicker so I seldom use them. I was trading a dividend etf, volume about 900k/day/I never panic sell/but some did/LOL
I'd imagine many traders go in planning to be like the beginning of this scene and end up being the end of it, and the market makers probably react much the same way.
%% I thought I saw, for the first time in my life/a random pattern in the tomatoe/produce section. My female friend appeared to be moving in a random pattern/produce/tomatoes. BUT on further observation, it was NOT random/ she did zigzag a lot. But she enjoyed shopping/so fun shopping was more important than a logical move. Some stuff I don't believe anyway; I was buying spxl or upro when it uptrended better /early in year. My broker,not charging me any commissions , sent me a message ''you are on the wrong side if the market + later in the year ''your price is too far away''LOL ''Wrong side of the market= fake or they accidently disclosed the orders /LOL My mistake on being too far away=it was a day order so my broker was right 50% of the time/LOL.