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Why should no one ever use market orders?

by frisco 10y ago

vidarh 10y ago
Imagine you place your order just as "something" happens to make the best price it can match move dramatically. If you truly want to sell or buy no matter the price, then sure, use a market order. But most of the time there will be a price that is too low/too high for you to want the order to execute. This is especially an issue for things like Bitcoin which can be extremely volatile, and where many of the exchanges have small enough volumes that they can suffer significantly more volatility than Bitcoin as a whole.
- iamdave 10y ago
  If you truly want to sell or buy no matter the price, then sure, use a market order. But most of the time there will be a price that is too low/too high for you to want the order to execute. Well...yes, exactly; bordering on a flat out "duh". Isn't this kind of the entire point of a market order? If you're convinced this is the price you're going to enter a position at, you're able to do so; otherwise you'd open a LIMIT order if the price is too low/too high for whatever trade strategy you're utilizing with margin trading. That's the entire reason market orders exist as another commenter points out. That doesn't mean no one should ever use market orders. Traders have different risk tolerances that inform their trade decisions; saying "no one should do it ever" seems like leaving an awful lot of nuance about currency (and other securities) strategy and price action on the table. If I've misunderstood your point, I'm open to a correction here, but I don't think what you've replied with is a wholly convincing argument on its face.
  - philipodonnell 10y ago
    I think its a matter of deciding which risk is the largest part of your current position, time or price. If your biggest risk is time because you're forced to enter an order or you might miss the move or you need to enter an order quickly/automatically and can't take the time to figure out the best price, then a market order is fine. If you biggest risk is the price (and you can afford to wait) then a limit order is better because you can essentially dictate the price at the expense of it maybe taking a long time/never to fill. They're just tradeoffs between risks, much like most other decisions in the market.
  - MichaelGG 10y ago
    It seems unlikely that someone would enter a sell limit at 0 or a buy at $MAX. That's what a market order is. Liquidating an account seems like one of the few times one would ever use it.
  - evanpw 10y ago
    > If you're convinced this is the price you're going to enter a position at, you're able to do so If you want to trade at the current price, then you'd send a limit order with the current price as limit price. The difference between that and a market order is in what happens if the price moves in the milliseconds between you clicking the button and the order executing: a limit order won't execute (or in general, will execute only if the price didn't move further than the limit you've set), while a market order will execute no matter what happens, even if your $100 stock had a flash crash down to 1 cent. That's basically never what you want.
  - vidarh 10y ago
    > If you're convinced this is the price you're going to enter a position at, you're able to do so; This is a prime examply of why to give the advice to never use a market order. This is exactly the type of situation where a limit order is the right choice rather than a market order, as with the market order you don't know that this is the price you'll enter the position at. If you enter a market order based on that thinking, you risk losing a lot of money, because you are making an unjustified assumption that the price can't/won't move all that much before it is filled. It's unlikely you're looking at the market price and think "if I place that market order now, I might end up selling at 30% below that/buying at 30% above that". But that can happen. On crypto exchanges, not only can it happen, but e.g. on smaller exchanges trading lesser coins against BTC it's not at all unusual for it to happen (e.g. you have have coins fluctuating up and down between 3-4 satoshi). Saying you should never do it is hyperbole, but the cases where there is a good reason to not enter a limit order instead are exceedingly few. Most of the times when people use market orders it tends to be lack of a trading strategy or lacking tools (panicked issuing of market order to account for lack of having suitable orders in place to protect you) or lack of understanding of the risk. I'd argue that the vast majority of the time, if you find yourself thinking you need a market order, maybe you do need it then and there in an urgent rush, but if so you should treat it as a warning sign that you may be doing something wrong (e.g. you don't have the right tools or strategy in place to protect you against risks) and re-evaluate what you're doing.
- frisco 10y ago
  It seems like anything except day traders should have no problem with market orders, then... 95% of the time I'm expecting to keep a position for months to years, and I really don't care +/- 5% on the day I enter the position. Grandparent made it sound like there was some deeper flaw with market orders that had been moved past with something new and I was a little confused.
  - dragonwriter 10y ago
    If you don't care about +/-5% but do care about wider swings, you should be issuing a limit order 5% on the unfavorable side of the current bid or ask (if you are selling or buying, respectively) rather than a market order. You should almost never use market orders, and (as your own justification does) most uses of them bake in assumptions about the likely movement of the market that can be more guaranteed, rather than hoped for probabilistically, with an appropriate limit order.
- dragonwriter 10y ago
  > If you truly want to sell or buy no matter the price, then sure, use a market order. Which is why it makes sense in the specific case of settling expired margin trades, where you have a binding commitment to return shares (buying them as necessary) no matter the price. I agree completely with the idea that market orders are generally to be avoided, but it's inherent to the entire concept of selling on margin.
Analemma_ 10y ago
Market orders often give a false impression of safety, and then can come back to bite you at the worst possible moment - when the market is very volatile. For example, say you have some commodity and you set up a stop order at $100. Often people assume this means that you're guaranteed to get at least $100 for your commodity, and so your losses are limited. But that's not what it means! What it means is, if the price goes below $100, your broker will sell for whatever they can get. Those aren't the same thing, and that's what makes market orders so dangerous. It's insidious because they are the same thing in normal, liquid markets, and they stop being the same thing when things get choppy. For a relatively recent example, a couple years ago Switzerland suddenly dropped the Franc's peg to the Euro, which momentarily spiked its value by 30% and made the market totally illiquid while people tried to figure out what the correct price was post-peg. A bunch of forex traders got wiped out as a result, because they had hugely levered positions on the Euro, and assumed that their stop orders would save them if something went wrong. But when the Franc spiked to 0.80 EUR, they had to sell at that price (at a huge loss) even though it settled back to 1 EUR moments later. If not for those market orders, they would've been fine.
- lend000 10y ago
  Slippage could be considered a disclaimer about market orders that some people don't realize, but keep in mind that market orders are essential to many exchanges (EDIT: based on the 'maker/taker' model, like GDAX). The market doesn't move/work without market orders, unless you have a limit order matching policy or something.
  - dragonwriter 10y ago
    Huh? Markets can move/work just fine with only limit orders at the lowest levels, and "a limit order matching policy" is a feature of all exchanges. Actually, markets don't work without limit orders and a limit order matching policy; market orders don't have anything to set a price for them without limit orders.
    - lend000 10y ago
koolba 10y ago
There's nothing wrong with market orders for liquid securities. If the market is not liquid you can run into issues where the fill for your order is way out of line with what you expected to pay. If you're trading common products (ex: SPY) then it's a non-issue. On the flip side, a limit order is effectively giving away a free call option as you're telling the market, "I'll pay $X for this". Normally someone would have to pay for that privilege.
- kasey_junk 10y ago
  The same is true for a market order as you are telling the market I will pay the market price no matter what it is. If you send a limit order through the book you will get price improved you won't pay your limit, thus it allows you to do a a market order with a backstop that protects you from wacky market swings.
- tedunangst 10y ago
  eh, by that logic, a market order is like telling the market "I'll pay $10000000 for this". normally someone would pay a lot for a put like that...
  - koolba 10y ago
    A market order executes against the current order book. The existing limit orders in the book, or more accurately the narrowest part of the book, are what gets executed. You can't act on it after the fact as it's an immediate "fill or kill".
- MichaelGG 10y ago
  Liquid and common like Proctor & Gamble in May 2010?
  - tedunangst 10y ago
    Jim Cramer: It's at 47, well that's a different security entirely, so what you have to do, though, you have to use limit orders, because Procter just jumped seven points because I said I liked it at 49. :)
philipodonnell 10y ago
Maybe its better to say that no one should ever _intentionally_ use a market order if a limit order is possible? A limit order to buy at 10% below the market price is effectively a market order in normal market conditions because it still fills at the best price, but you're also protected from abnormal conditions. So the limit order is lower risk and you got that lower risk for free (if the commission is the same), so why would you ever use a higher risk order type for no benefit? The exception is if you're forced to enter an order because of a previous transaction. In that case the risk inherent in market vs limit was a part of the transaction that you're being forced to exit. In fact being forced to exit introduces a new risk, time to fill, and a market order is the best way to mitigate that risk vs a limit order. Use a limit order if you're doing the trade on your own terms because you reduce your risk for free.
dnautics 10y ago
I think that's a pretty strong statement. If your risk of missing out on making a trade is greater than the expected loss due to execution, then you should put in a market order. Bitcoin is a bit more volatile, so the bid/ask changing while you're putting the order in can be a problem. If you're trading stocks, it is almost never a big deal, but if you put in an off-hours market order that executes when the market opens you can get hurt (I missed out on 10% worth of profits on a trade once due to this - but I still made money). Of course if you're looking directly at the bid/ask spread and you're picking which orders to "buy on the market", then it's usually fine, especially if the market queues orders.
- dragonwriter 10y ago
  > I think that's a pretty strong statement. If your risk of missing out on making a trade is greater than the expected loss due to execution, then you should put in a market order. In almost any real case, you can just set a limit order price which appropriately balances those risks. Unless you are really willing to accept buying/selling at any price (or, where they exist, any price that wouldn't be prevented by exchange-implemented circuit breakers), you should be choosing limit rather than market orders.

Why should no one ever use market orders?

by frisco 10y ago

Why should no one ever use market orders?

Imagine you place your order just as "something" happens to make the best price it can match move dramatically. If you truly want to sell or buy no matter the price, then sure, use a market order. But most of the time there will be a price that is too low/too high for you to want the order to execute. This is especially an issue for things like Bitcoin which can be extremely volatile, and where many of the exchanges have small enough volumes that they can suffer significantly more volatility than Bitcoin as a whole.

iamdave 10y ago
If you truly want to sell or buy no matter the price, then sure, use a market order. But most of the time there will be a price that is too low/too high for you to want the order to execute. Well...yes, exactly; bordering on a flat out "duh". Isn't this kind of the entire point of a market order? If you're convinced this is the price you're going to enter a position at, you're able to do so; otherwise you'd open a LIMIT order if the price is too low/too high for whatever trade strategy you're utilizing with margin trading. That's the entire reason market orders exist as another commenter points out. That doesn't mean no one should ever use market orders. Traders have different risk tolerances that inform their trade decisions; saying "no one should do it ever" seems like leaving an awful lot of nuance about currency (and other securities) strategy and price action on the table. If I've misunderstood your point, I'm open to a correction here, but I don't think what you've replied with is a wholly convincing argument on its face.
- philipodonnell 10y ago
  I think its a matter of deciding which risk is the largest part of your current position, time or price. If your biggest risk is time because you're forced to enter an order or you might miss the move or you need to enter an order quickly/automatically and can't take the time to figure out the best price, then a market order is fine. If you biggest risk is the price (and you can afford to wait) then a limit order is better because you can essentially dictate the price at the expense of it maybe taking a long time/never to fill. They're just tradeoffs between risks, much like most other decisions in the market.
- MichaelGG 10y ago
  It seems unlikely that someone would enter a sell limit at 0 or a buy at $MAX. That's what a market order is. Liquidating an account seems like one of the few times one would ever use it.
- evanpw 10y ago
  > If you're convinced this is the price you're going to enter a position at, you're able to do so If you want to trade at the current price, then you'd send a limit order with the current price as limit price. The difference between that and a market order is in what happens if the price moves in the milliseconds between you clicking the button and the order executing: a limit order won't execute (or in general, will execute only if the price didn't move further than the limit you've set), while a market order will execute no matter what happens, even if your $100 stock had a flash crash down to 1 cent. That's basically never what you want.
- vidarh 10y ago
  > If you're convinced this is the price you're going to enter a position at, you're able to do so; This is a prime examply of why to give the advice to never use a market order. This is exactly the type of situation where a limit order is the right choice rather than a market order, as with the market order you don't know that this is the price you'll enter the position at. If you enter a market order based on that thinking, you risk losing a lot of money, because you are making an unjustified assumption that the price can't/won't move all that much before it is filled. It's unlikely you're looking at the market price and think "if I place that market order now, I might end up selling at 30% below that/buying at 30% above that". But that can happen. On crypto exchanges, not only can it happen, but e.g. on smaller exchanges trading lesser coins against BTC it's not at all unusual for it to happen (e.g. you have have coins fluctuating up and down between 3-4 satoshi). Saying you should never do it is hyperbole, but the cases where there is a good reason to not enter a limit order instead are exceedingly few. Most of the times when people use market orders it tends to be lack of a trading strategy or lacking tools (panicked issuing of market order to account for lack of having suitable orders in place to protect you) or lack of understanding of the risk. I'd argue that the vast majority of the time, if you find yourself thinking you need a market order, maybe you do need it then and there in an urgent rush, but if so you should treat it as a warning sign that you may be doing something wrong (e.g. you don't have the right tools or strategy in place to protect you against risks) and re-evaluate what you're doing.
frisco 10y ago
It seems like anything except day traders should have no problem with market orders, then... 95% of the time I'm expecting to keep a position for months to years, and I really don't care +/- 5% on the day I enter the position. Grandparent made it sound like there was some deeper flaw with market orders that had been moved past with something new and I was a little confused.
- dragonwriter 10y ago
  If you don't care about +/-5% but do care about wider swings, you should be issuing a limit order 5% on the unfavorable side of the current bid or ask (if you are selling or buying, respectively) rather than a market order. You should almost never use market orders, and (as your own justification does) most uses of them bake in assumptions about the likely movement of the market that can be more guaranteed, rather than hoped for probabilistically, with an appropriate limit order.
dragonwriter 10y ago
> If you truly want to sell or buy no matter the price, then sure, use a market order. Which is why it makes sense in the specific case of settling expired margin trades, where you have a binding commitment to return shares (buying them as necessary) no matter the price. I agree completely with the idea that market orders are generally to be avoided, but it's inherent to the entire concept of selling on margin.

Analemma_ 10y ago

Market orders often give a false impression of safety, and then can come back to bite you at the worst possible moment - when the market is very volatile. For example, say you have some commodity and you set up a stop order at $100. Often people assume this means that you're guaranteed to get at least $100 for your commodity, and so your losses are limited. But that's not what it means! What it means is, if the price goes below $100, your broker will sell for whatever they can get. Those aren't the same thing, and that's what makes market orders so dangerous. It's insidious because they are the same thing in normal, liquid markets, and they stop being the same thing when things get choppy. For a relatively recent example, a couple years ago Switzerland suddenly dropped the Franc's peg to the Euro, which momentarily spiked its value by 30% and made the market totally illiquid while people tried to figure out what the correct price was post-peg. A bunch of forex traders got wiped out as a result, because they had hugely levered positions on the Euro, and assumed that their stop orders would save them if something went wrong. But when the Franc spiked to 0.80 EUR, they had to sell at that price (at a huge loss) even though it settled back to 1 EUR moments later. If not for those market orders, they would've been fine.

lend000 10y ago
Slippage could be considered a disclaimer about market orders that some people don't realize, but keep in mind that market orders are essential to many exchanges (EDIT: based on the 'maker/taker' model, like GDAX). The market doesn't move/work without market orders, unless you have a limit order matching policy or something.
- dragonwriter 10y ago
  Huh? Markets can move/work just fine with only limit orders at the lowest levels, and "a limit order matching policy" is a feature of all exchanges. Actually, markets don't work without limit orders and a limit order matching policy; market orders don't have anything to set a price for them without limit orders.
  - lend000 10y ago

koolba 10y ago

There's nothing wrong with market orders for liquid securities. If the market is not liquid you can run into issues where the fill for your order is way out of line with what you expected to pay. If you're trading common products (ex: SPY) then it's a non-issue. On the flip side, a limit order is effectively giving away a free call option as you're telling the market, "I'll pay $X for this". Normally someone would have to pay for that privilege.

kasey_junk 10y ago
The same is true for a market order as you are telling the market I will pay the market price no matter what it is. If you send a limit order through the book you will get price improved you won't pay your limit, thus it allows you to do a a market order with a backstop that protects you from wacky market swings.
tedunangst 10y ago
eh, by that logic, a market order is like telling the market "I'll pay $10000000 for this". normally someone would pay a lot for a put like that...
- koolba 10y ago
  A market order executes against the current order book. The existing limit orders in the book, or more accurately the narrowest part of the book, are what gets executed. You can't act on it after the fact as it's an immediate "fill or kill".
MichaelGG 10y ago
Liquid and common like Proctor & Gamble in May 2010?
- tedunangst 10y ago
  Jim Cramer: It's at 47, well that's a different security entirely, so what you have to do, though, you have to use limit orders, because Procter just jumped seven points because I said I liked it at 49. :)

philipodonnell 10y ago

Maybe its better to say that no one should ever _intentionally_ use a market order if a limit order is possible? A limit order to buy at 10% below the market price is effectively a market order in normal market conditions because it still fills at the best price, but you're also protected from abnormal conditions. So the limit order is lower risk and you got that lower risk for free (if the commission is the same), so why would you ever use a higher risk order type for no benefit? The exception is if you're forced to enter an order because of a previous transaction. In that case the risk inherent in market vs limit was a part of the transaction that you're being forced to exit. In fact being forced to exit introduces a new risk, time to fill, and a market order is the best way to mitigate that risk vs a limit order. Use a limit order if you're doing the trade on your own terms because you reduce your risk for free.

dnautics 10y ago

I think that's a pretty strong statement. If your risk of missing out on making a trade is greater than the expected loss due to execution, then you should put in a market order. Bitcoin is a bit more volatile, so the bid/ask changing while you're putting the order in can be a problem. If you're trading stocks, it is almost never a big deal, but if you put in an off-hours market order that executes when the market opens you can get hurt (I missed out on 10% worth of profits on a trade once due to this - but I still made money). Of course if you're looking directly at the bid/ask spread and you're picking which orders to "buy on the market", then it's usually fine, especially if the market queues orders.

dragonwriter 10y ago
> I think that's a pretty strong statement. If your risk of missing out on making a trade is greater than the expected loss due to execution, then you should put in a market order. In almost any real case, you can just set a limit order price which appropriately balances those risks. Unless you are really willing to accept buying/selling at any price (or, where they exist, any price that wouldn't be prevented by exchange-implemented circuit breakers), you should be choosing limit rather than market orders.