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Is this just another piece of data confirming that it is a bad idea to place market orders? With a market order you are essentially saying to the broker "I want

• Bostonian 6y ago
  I agree with placing limit orders instead of market orders, but if an illiquid stock is quoted at 20.00 to 20.10, placing a limit order to buy at 20.10 is not much different from a market order, at least for a small number of shares. It's possible some brokers will offer more price improvement than others in this trade, filling you at less than 20.10.
  • drcode 6y ago
    Agreed
  • hef19898 6y ago
    Thinking about it, I never used anything else than limit orders. Not saying much, so, as I maybe used that to sell like 4 times in tha last one year and half.
    • dboreham 6y ago
      Jim Cramer has been advising never to use market orders for several years.
• Dirlewanger 6y ago
  How much does this actually matter for the casual retail investor? I'll typically buy 5-10 shares of some ETFs every couple months via market orders (not on Robinhood), am I really getting bilked that bad?
  • op00to 6y ago
    I dunno. What’s your strategy? Mine is to eke out as much as I can out of what little I have, so I use limit orders to keep within my strategy. Market orders would fuck that up.
    • WanderPanda 6y ago
      I mean you are providing free sell options to the market if your limits are below the current price. I‘m not sure thats much better. I just place limits way above the current price to get a market order with no risk at getting rekt by a bug or a sudden market movement
      • drcode 6y ago
        While your analysis is correct, providing free sell options is a second-order effect, whereas a market order is a first-order effect. I think such second-order effects are much harder (though not impossible) for people to game.
  • rybosworld 6y ago
    It matters much more for large orders, but there's always some additional risk with a market order regardless of size. Depending on your broker, they may have built-in safety mechanisms for market orders. I use Fidelity and they have a price improvement feature. They basically execute your order at the best possible price available at that time.
  • JoshTko 6y ago
    Probably not in your scenario. But if you're making a larger order say $50k. you may see even like 0.5% difference in fill price between brokerages so $250. Also depends on liquidity of the stock being traded, if it's relatively low volume you may have even larger differences.
    • jacurtis 6y ago
      I think this is the main takeaway from the article. The whole time i read it I kept thinking, that this actually sounds like a good tradeoff for the average Robin Hood customer. The way that this is bad is if you are a high frequency trader making micro-trades to capitalize on tiny upticks throughout the day. These rely on frequent 0.5% upticks to make money, so a 0.5% surcharge cancels out its effectiveness. Or someone who is pushing significant capital through the brokerage. If you are pushing $10k - $100k trades then this starts to really significantly hurt you. But then again, Robin Hood isn't really meant for you either. Schwabe, TD Ameritrade, Fedelity would work better for you. But for the average Robin Hood investor, most of us are making a handful of trades a month at small volumes (yes, even $1,000 trade is a small volume). Most Robin Hood customers are trading even less. A single share here and there. In the later case, this technique for revenue generation from Robin Hood is actually GOOD for its customers. Instead of paying a flat $7 trade fee that a larger investment firm might charge, you get a "free" trade that technically was marked up 0.5%. So on a $50 share, this means you pay $50.25, essentially a 25¢ fee. This is still better for Robin Hoods customers. And Robin Hood making money is actually a good thing for their customers, because it means they can stay around and continue to exist. Robin Hood serves a niche in the trading space that larger firms have no interest in serving. Robin Hood is starting to learn why the larger firms have no interest in this space, but if Robin Hood can figure it out, then it is good for the larger population that can benefit from its service.
• x87678r 6y ago
  > "I want this stock right now, you can decide what the price is" No this is too pessimistic, there are best execution rules which say the broker must get the best price possible. It can trade off exchange with a hedge fund, in a dark pool or internally with another customer, but the price must be better than that of the exchange bid/ask.
  • drcode 6y ago
    It seems obvious to me that these rules can be skirted by just time-compressing the process, since it's hard to prove whether an order was placed at, let's say, noon+5msec versus noon+15msec. Suddenly, the popularity and profitability of HFT starts making a lot more sense.
    • harryh 6y ago
      Suddenly, the popularity and profitability of HFT starts making a lot more sense. If you think that the profitability (what little there is left) of HFT is due to maliciously manipulating the time of customer order submissions than your understanding of how this system works is flawed.
      • drcode 6y ago
        I believe HFT is often used to front-run other trades. I don't think I'm crazy believing this, I would love to read something to convince me that this belief is wrong.
        • tptacek 6y ago
          Why don't you start by telling us what you have read, about HFT and about the concept of front-running.
          • rmrfstar 6y ago
            It's a pretty simple concept. Net orderflow moves the price in the direction of the flow. Having foreknowledge of net flows implies knowledge of future price changes. Front-running is just trading on that knowledge. Here are some ways it happens: 1. A broker-dealer has client orders in its possession and trades ahead of them (classic front running) 2. A hedge fund with 2 portfolios trading correlated signals, one faster than the other (the Medallion-RIEF hypothesis) 3. Anticipate retails flows using behavioral advertising data or network intercepts from a statistically meaningful population (the Robintrack model) There are more, but they all share the same flavour. I wonder if Robinhood is sending retail orders to anyone running strategy 3.
• jcfrei 6y ago
  > It seems like market orders are, and always have been, for chumps. It's not as simple as that. Market orders vs limit orders are a trade-off between immediacy and price. If you have an information advantage you may want to capture it as fast as possible and execute a market order (or a limit order that crosses the spread). The person on the other side with the standing limit order faces the risk of adverse selection (ie. they are only matched when their information is out of date and the price is too low or high). With a limit order you can avoid crossing the spread but you might either miss getting filled or only be matched when the price moves against you.
  • drcode 6y ago
    I think the first order assumption needs to be that the person with the information advantage is always the broker, not the retail investor buying a stock. Therefore, you should trade in a way to minimize this advantage. (I know you're using the term "information advantage" in a different sense, but I'd argue that type of advantage is swamped by the information asymmetry between the broker and retail client)
• gandutraveler 6y ago
  As others have commented there is NBBO( National Best Bid Offer) book that every broker has to respect. Price improvement that the article talks about is totally upto the broker if they want to pass it back to the customer or not. Or if they have a deal with their buyer. This happens a lot more in over the counter markets like FX. Overall Robinhood has been a net positive that disrupted & forced old retail investors trading platforms to go 0 commission
• brightball 6y ago
  I never really thought about it like that, but it makes sense. I’ve always been more of a long term dividend investor so micromanaging my trades isn’t something that I tend to spend much time worrying about. If it’s a good investment, it’s a good investment.
  • JKCalhoun 6y ago
    Yeah, I buy and hold and I don't see a significant difference between a few cents with a market vs. a limit order.
    • kasey_junk 6y ago
      Limit orders are a risk management technique. Your limit order will not fill if you can’t get the price you want. A market order is subject to microstructure fluctuations such as flash crashes. All things being equal if you don’t care much about execution costs limit orders that cross the market are what you want.
      • JKCalhoun 6y ago
        I feel like the brokerage I was using would make the purchase at market close (Vanguard index funds). I assume at the market closing price? That gets rid of a flash crash danger anyway.
        • kasey_junk 6y ago
          Not really. Exchanges have circuit breakers so the closing price. An frequently be the bottom or top of the market during extreme events.
  • kaycebasques 6y ago
    If you're buying something with low liquidity (e.g. an ETF with low AUM or a small-cap stock) the bid/ask spread can be huge. When I first started investing/speculating I made the mistake of putting in market orders without checking the spread. That resulted in me paying $1 or more per share above the last quoted market price. E.g. the last market quote was $65, but the going ask was $66. After-hours market orders (even on large-cap stocks or high AUM ETFs) can also cause some nasty surprises.
• seanhunter 6y ago
  No it is not. Best execution is a lot more complex than market vs limit. The normal metric for best execution is "implementation shortfall" which is the difference between the market price at the "decision time" (when the order arrives at RH is the best they can do here) and the executed price. Poor execution leads to a lot of shortfall, good execution leads to a small amount of shortfall and in some cases even negative shortfall. You can think about execution slippage as being the "information impact" of trading and a good broker will attempt to minimise this cost along with other transaction costs (eg fees etc).
• seppel 6y ago
  > It seems like market orders are, and always have been, for chumps. Note that for a limit order to be executed, you need someone else doing a market order (or a limit order with price below market).