Getting better price with Market Orders instead of Limit Orders on ETF?

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richard.h.gao
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Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

An ETF has a $0.20 spread. With limit orders I am only able to get $0.05 below ask, but with a market order it executes at $0.07 below ask. What's going on?
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by sycamore »

What's the ticker?
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

sycamore wrote: Tue Jan 18, 2022 1:53 pm What's the ticker?
IDLB
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by livesoft »

You have fallen into the conventional wisdom that limit orders may be better. You have proven that the CW is not always correct.

See also: viewtopic.php?t=165732
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by typical.investor »

livesoft wrote: Tue Jan 18, 2022 2:01 pm You have fallen into the conventional wisdom that limit orders may be better. You have proven that the CW is not always correct.

See also: viewtopic.php?t=165732
If the average trading volume is $10k/day (um 361 shares per day isn't much), I suspect that the difference in time for when the market order was place and limit order was placed could result in significant differences in what's on the trading table.

I wouldn't conclude that this proves anything. Sure the timing of the market order got a better price, but the limit order would have nabbed that too if it were available at the time the limit order were open.

Anyway, I wouldn't be placing market orders on shares that average 361 trades per day. You are too likely to run into a case where someone has an outrageous limit order open just in case someone bites with a market order.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

typical.investor wrote: Tue Jan 18, 2022 2:07 pm Anyway, I wouldn't be placing market orders on shares that average 361 trades per day. You are too likely to run into a case where someone has an outrageous limit order open just in case someone bites with a market order.
That's what I'm concerned about. But I've been noticing better price execution on market orders especially with low volume ETFs or where the spread is wide. Maybe just luck with timing?
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by typical.investor »

richard.h.gao wrote: Tue Jan 18, 2022 2:16 pm
typical.investor wrote: Tue Jan 18, 2022 2:07 pm Anyway, I wouldn't be placing market orders on shares that average 361 trades per day. You are too likely to run into a case where someone has an outrageous limit order open just in case someone bites with a market order.
That's what I'm concerned about. But I've been noticing better price execution on market orders especially with low volume ETFs or where the spread is wide. Maybe just luck with timing?
Assuming you are just not "seeing things" - I mean inferring a pattern from a small number of variable cases, then I wonder how your broker is routing the trades. Are the limit orders marketable?

Retail brokers commonly route non-marketable orders to exchanges and marketable orders to wholesellers.

If the limit orders are marketable, I'd expect them to be going to the same place as market orders and don't understand why there would be a difference.

Anyway, the wholesellers are acting on a little different information so may be giving you a little different price with price improvement. The analogy I have seen is that you get a discount based on the fact that the system (by virtue of not having all information public) has marked everything up and your rebate is a fraction of that mark-up.

Again though, I can't explain why a marketable limit order would behave differently than a market order.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by vineviz »

richard.h.gao wrote: Tue Jan 18, 2022 2:16 pm
typical.investor wrote: Tue Jan 18, 2022 2:07 pm Anyway, I wouldn't be placing market orders on shares that average 361 trades per day. You are too likely to run into a case where someone has an outrageous limit order open just in case someone bites with a market order.
That's what I'm concerned about. But I've been noticing better price execution on market orders especially with low volume ETFs or where the spread is wide. Maybe just luck with timing?
There's actually no reason to be concerned about using market orders with ETFs which have low average daily trading volume, certainly not more concerned than with an ETF which has high trading volume. What you've observed is constant with what we know to be true: ETF liquidity is primarily a function of the fund's underlying securities, not the AUM or ADV of the ETF itself.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

typical.investor wrote: Tue Jan 18, 2022 2:58 pm
richard.h.gao wrote: Tue Jan 18, 2022 2:16 pm
typical.investor wrote: Tue Jan 18, 2022 2:07 pm Anyway, I wouldn't be placing market orders on shares that average 361 trades per day. You are too likely to run into a case where someone has an outrageous limit order open just in case someone bites with a market order.
That's what I'm concerned about. But I've been noticing better price execution on market orders especially with low volume ETFs or where the spread is wide. Maybe just luck with timing?
Assuming you are just not "seeing things" - I mean inferring a pattern from a small number of variable cases, then I wonder how your broker is routing the trades. Are the limit orders marketable?

Retail brokers commonly route non-marketable orders to exchanges and marketable orders to wholesellers.

If the limit orders are marketable, I'd expect them to be going to the same place as market orders and don't understand why there would be a difference.

Anyway, the wholesellers are acting on a little different information so may be giving you a little different price with price improvement. The analogy I have seen is that you get a discount based on the fact that the system (by virtue of not having all information public) has marked everything up and your rebate is a fraction of that mark-up.

Again though, I can't explain why a marketable limit order would behave differently than a market order.
That's the thing, I have to keep raising my limit order until it executes. Then if I place a market order it will execute below what my limit order executed at.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

vineviz wrote: Tue Jan 18, 2022 3:05 pm There's actually no reason to be concerned about using market orders with ETFs which have low average daily trading volume, certainly not more concerned than with an ETF which has high trading volume. What you've observed is constant with what we know to be true: ETF liquidity is primarily a function of the fund's underlying securities, not the AUM or ADV of the ETF itself.
I've read that as well. But I'm planning to make large purchases and don't want my x500 market order to blow up when the total daily volume is only x50.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by vineviz »

richard.h.gao wrote: Tue Jan 18, 2022 3:10 pm
vineviz wrote: Tue Jan 18, 2022 3:05 pm There's actually no reason to be concerned about using market orders with ETFs which have low average daily trading volume, certainly not more concerned than with an ETF which has high trading volume. What you've observed is constant with what we know to be true: ETF liquidity is primarily a function of the fund's underlying securities, not the AUM or ADV of the ETF itself.
I've read that as well. But I'm planning to make large purchases and don't want my x500 market order to blow up when the total daily volume is only x50.
Again, this is not a thing you should worry about.

I'm not sure what the appeal of IDLB is for you, but 50,000 shares would represent less than 0.05% of the daily volume of the underlying stocks.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by Gufomel »

Wait...so if you’re buying an ETF it doesn’t matter what sale orders are available on the books for that specific ETF, but rather the underlying securities?
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by typical.investor »

richard.h.gao wrote: Tue Jan 18, 2022 3:06 pm
typical.investor wrote: Tue Jan 18, 2022 2:58 pm
richard.h.gao wrote: Tue Jan 18, 2022 2:16 pm
typical.investor wrote: Tue Jan 18, 2022 2:07 pm Anyway, I wouldn't be placing market orders on shares that average 361 trades per day. You are too likely to run into a case where someone has an outrageous limit order open just in case someone bites with a market order.
That's what I'm concerned about. But I've been noticing better price execution on market orders especially with low volume ETFs or where the spread is wide. Maybe just luck with timing?
Assuming you are just not "seeing things" - I mean inferring a pattern from a small number of variable cases, then I wonder how your broker is routing the trades. Are the limit orders marketable?

Retail brokers commonly route non-marketable orders to exchanges and marketable orders to wholesellers.

If the limit orders are marketable, I'd expect them to be going to the same place as market orders and don't understand why there would be a difference.

Anyway, the wholesellers are acting on a little different information so may be giving you a little different price with price improvement. The analogy I have seen is that you get a discount based on the fact that the system (by virtue of not having all information public) has marked everything up and your rebate is a fraction of that mark-up.

Again though, I can't explain why a marketable limit order would behave differently than a market order.
That's the thing, I have to keep raising my limit order until it executes. Then if I place a market order it will execute below what my limit order executed at.
Seems like they are going to different exchanges as described above.

I would make the limit order marketable. I always do that routinely as a habit for all ETF trades (even when not necessary on highly liquid ETFs).

By the way, I see the ask on IDLB now is $4294.67 and the bid is $0.01. Woe to those who place a market order (perhaps not realizing what time it is and the market is closed). Could be a big surprise on open. I've trades low volume ETFs and there was nothing at the opening cross meaning a market order could go through at those prices.

Anyway, if the price were say around $29 as it is now and the ask $29.20 and the bid $28.80, I make a marketable limit order of $29.25. Effectively that is a market order when executed with the protection against a flash crash or mistiming (nothing realistic available on open as shown above).
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by typical.investor »

Gufomel wrote: Tue Jan 18, 2022 3:20 pm Wait...so if you’re buying an ETF it doesn’t matter what sale orders are available on the books for that specific ETF, but rather the underlying securities?
Given that the creation unit is 50,000 shares here, I do believe it does matter what orders are available on the books. Sure, units will be created and redeemed at the price of the underlying securities but if the aggregate demand isn't sufficient to warrant unit creation/redemption then what? The 30 days average trading volume is 361 shares. What do you think?
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by vineviz »

Gufomel wrote: Tue Jan 18, 2022 3:20 pm Wait...so if you’re buying an ETF it doesn’t matter what sale orders are available on the books for that specific ETF, but rather the underlying securities?
That's basically it, yes.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

typical.investor wrote: Tue Jan 18, 2022 3:22 pm Seems like they are going to different exchanges as described above.

I would make the limit order marketable. I always do that routinely as a habit for all ETF trades (even when not necessary on highly liquid ETFs).
Interesting. Sounds like a good plan, thanks. 👍
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by vineviz »

typical.investor wrote: Tue Jan 18, 2022 3:22 pm Seems like they are going to different exchanges as described above.

I would make the limit order marketable. I always do that routinely as a habit for all ETF trades (even when not necessary on highly liquid ETFs).
I concur with this, by the way. A marketable limit order should provide the best execution AND some protection against fat finger and/or flash crash risk.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by DS03 »

Gufomel wrote: Tue Jan 18, 2022 3:20 pm Wait...so if you’re buying an ETF it doesn’t matter what sale orders are available on the books for that specific ETF, but rather the underlying securities?
I'm not sure I agree with this... it isn't logical. Back in March 2020 there were some big differences in closing ETF prices vs identical MF prices calculated after the market closed. This had to be based on the ETF liquidity/pricing itself and not the underlying securities. If I'm wrong here somebody please explain.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by typical.investor »

DS03 wrote: Tue Jan 18, 2022 3:59 pm
Gufomel wrote: Tue Jan 18, 2022 3:20 pm Wait...so if you’re buying an ETF it doesn’t matter what sale orders are available on the books for that specific ETF, but rather the underlying securities?
I'm not sure I agree with this... it isn't logical. Back in March 2020 there were some big differences in closing ETF prices vs identical MF prices calculated after the market closed. This had to be based on the ETF liquidity/pricing itself and not the underlying securities. If I'm wrong here somebody please explain.
Well, don't assume the MF prices at that time were based off the underlying. MF prices at NAV weren't really reflective if you had to go into the market and actually sell the shares. The ETF prices were closer to accurate, but again there is the unit creation/redemption size limitation.
So to some degree, the ETF was dropping in value as there were no buyers (ie. the ETF liquidity/pricing itself), but in addition; even if units were redeemed based on the underlying they would be done so at below the MF stated NAV because that was an estimate that didn't reflect actual conditions.

Anyway, I was happy to sell bond ETFs at below their NAV in March 2020 as stocks were even more depressed. By the end of the day, stocks had already recovered. If I had been selling bond ETFs to fund my retirement, I wouldn't have been happy but who sells bonds for spending when the market is effectively frozen. I guess MFs give that option but those who don't sell are kinda holding the bag if NAVs don't recover to the point that the MF let other investors redeem for.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by AlohaJoe »

typical.investor wrote: Tue Jan 18, 2022 3:32 pm
Gufomel wrote: Tue Jan 18, 2022 3:20 pm Wait...so if you’re buying an ETF it doesn’t matter what sale orders are available on the books for that specific ETF, but rather the underlying securities?
Given that the creation unit is 50,000 shares here, I do believe it does matter what orders are available on the books. Sure, units will be created and redeemed at the price of the underlying securities but if the aggregate demand isn't sufficient to warrant unit creation/redemption then what? The 30 days average trading volume is 361 shares. What do you think?
If you want to buy 50,000 shares of IDLB then call Invesco at 1-800-983-0903 and tell them that. Alternatively, contact your broker's block trade desk. But I'd start with Invesco.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by typical.investor »

AlohaJoe wrote: Tue Jan 18, 2022 5:43 pm
typical.investor wrote: Tue Jan 18, 2022 3:32 pm
Gufomel wrote: Tue Jan 18, 2022 3:20 pm Wait...so if you’re buying an ETF it doesn’t matter what sale orders are available on the books for that specific ETF, but rather the underlying securities?
Given that the creation unit is 50,000 shares here, I do believe it does matter what orders are available on the books. Sure, units will be created and redeemed at the price of the underlying securities but if the aggregate demand isn't sufficient to warrant unit creation/redemption then what? The 30 days average trading volume is 361 shares. What do you think?
If you want to buy 50,000 shares of IDLB then call Invesco at 1-800-983-0903 and tell them that. Alternatively, contact your broker's block trade desk. But I'd start with Invesco.
Well Schwab actually states to contact them on orders of 10,000 or more shares, or orders over $500,000, but yeah sure for 50,000 maybe call Invesco first.

And if you want 1,000 or 5,000 shares, you are going to be paying the price that the ETF is going for which is based on the price of sales orders available. The underlyings aren't necessarily going to be considered in the price for those. Supply and demand of existing shares will.

Except that you might benefit from a size improvement, but again this would require either placing a market order or a marketable limit order and you wouldn't get it on an exchange.
An order outsizes the NBBO when it is for more shares than are displayed at the NBBO – e.g., when a retail order for 4,000 shares is filled by a market center when the NBBO only shows 700 shares, and all 4,000 shares are filled at or better than the NBBO price (which was only for 700 shares). When this happens, we call it “Size Improvement” because the market center (or wholesaler) is providing liquidity in the size necessary to completely fill the retail order. Size Improvement provides massive benefits to retail investors – typically about 2 times greater than PI benefits because it happens very frequently – indeed, approximately 45% of shares (and 54% of the value traded) filled by Virtu in 2020 were from orders that outsized the NBBO.9 Unfortunately, Size Improvement is not reflected in current Rule 605 reports.
To be honest, I am not really sure if I have ever benefitted from "size improvement" or not. Price improvement is always displayed. I don't think "size improvement" is displayed anywhere.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by zincTwo »

I'm not sure if I have received a huge benefit, but at Fidelity, I feel a satisfying little boost when I see their "price improvement" price.

Ref: fidelity.com/.../trading-tools/price-improvement
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by JackoC »

typical.investor wrote: Tue Jan 18, 2022 3:32 pm
Gufomel wrote: Tue Jan 18, 2022 3:20 pm Wait...so if you’re buying an ETF it doesn’t matter what sale orders are available on the books for that specific ETF, but rather the underlying securities?
Given that the creation unit is 50,000 shares here, I do believe it does matter what orders are available on the books. Sure, units will be created and redeemed at the price of the underlying securities but if the aggregate demand isn't sufficient to warrant unit creation/redemption then what? The 30 days average trading volume is 361 shares. What do you think?
Even for quite liquid, widely traded ETF's the bid offers displayed aren't the same. For example, IVV and SPY S&P 500 ETF's. IVV has a lot of volume compared to most non-broad index ETF's but SPY has hyper volume. The bid-offer on SPY is usually only $.01, IVV is usually a few $.01's. 50,000 share trades (both those ETF's creation unit size) wouldn't be relevant to many people here I wouldn't think ( ~$23mil). IOW I agree, liquidity of the underlying assets is only one factor in the liquidity of the ETF and especially in practical situations of typical retail investor trades.

Also, maybe it's a too simplistic challenge of the premise, but positions in less than extremely liquid ETF's you plan to adjust frequently but not in a real 'treading' way have a definite cost compared to doing it with MF's at NAV end of day if equivalent MF exists but anyway a cost. And if you are outright trading in less than extremely liquid ETF's, rather than just adjusting/rebalancing 'stay the course' allocations, I believe you'd need real time information about underlying asset prices comparable to what authorized participants (those creating shares) have for it to have much chance of being productive.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

vineviz wrote: Tue Jan 18, 2022 3:58 pm
typical.investor wrote: Tue Jan 18, 2022 3:22 pm Seems like they are going to different exchanges as described above.

I would make the limit order marketable. I always do that routinely as a habit for all ETF trades (even when not necessary on highly liquid ETFs).
I concur with this, by the way. A marketable limit order should provide the best execution AND some protection against fat finger and/or flash crash risk.
Tried this and it did not work. Did a bunch of market orders and marketable limit orders back to back and the market orders always got better price execution. :confused
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by vineviz »

JackoC wrote: Wed Jan 19, 2022 9:31 am The bid-offer on SPY is usually only $.01, IVV is usually a few $.01's. 50,000 share trades (both those ETF's creation unit size) wouldn't be relevant to many people here I wouldn't think ( ~$23mil).
Bid-ask spread is a measure of transaction cost, not liquidity. There is generally a negative relationship between bid-ask spreads and ADV/AUM, which makes larger ETFs (generally) cheaper to transact.

Using this example, SPY can be a good choice for someone who is frequently trading. This is because the lower spread can offset the higher expense ratio. On the other hand, IVV might be a better choice for a long-term buy-and-hold investor since the higher bid-ask spread is only paid once whereas the lower expense ratio is forever.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by JackoC »

vineviz wrote: Wed Jan 19, 2022 10:23 am
JackoC wrote: Wed Jan 19, 2022 9:31 am The bid-offer on SPY is usually only $.01, IVV is usually a few $.01's. 50,000 share trades (both those ETF's creation unit size) wouldn't be relevant to many people here I wouldn't think ( ~$23mil).
1. Bid-ask spread is a measure of transaction cost, not liquidity. There is generally a negative relationship between bid-ask spreads and ADV/AUM, which makes larger ETFs (generally) cheaper to transact.

2. Using this example, SPY can be a good choice for someone who is frequently trading. This is because the lower spread can offset the higher expense ratio. On the other hand, IVV might be a better choice for a long-term buy-and-hold investor since the higher bid-ask spread is only paid once whereas the lower expense ratio is forever.
1. I don't see a practical difference at practical retail transaction sizes.

2. This is a complete tangent to the point.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by vineviz »

JackoC wrote: Wed Jan 19, 2022 10:28 am 1. I don't see a practical difference at practical retail transaction sizes.
The difference is "liquidity" refers to marginal price impact which results from having a large order that must execute immediately.

If a small transaction can be executed immediately at the same price that a large transaction executes, the security is liquid.

Example: if the prevailing price of an ETF is $60, the question is whether will expect to pay a higher price to immediately purchase 10x the average daily volume than you'd pay to immediately purchase 1% of the average daily volume. If the price is the same then we'd say the security is liquid.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by typical.investor »

richard.h.gao wrote: Wed Jan 19, 2022 9:59 am
vineviz wrote: Tue Jan 18, 2022 3:58 pm
typical.investor wrote: Tue Jan 18, 2022 3:22 pm Seems like they are going to different exchanges as described above.

I would make the limit order marketable. I always do that routinely as a habit for all ETF trades (even when not necessary on highly liquid ETFs).
I concur with this, by the way. A marketable limit order should provide the best execution AND some protection against fat finger and/or flash crash risk.
Tried this and it did not work. Did a bunch of market orders and marketable limit orders back to back and the market orders always got better price execution. :confused
Hmnn. Head scratcher.

So just to confirm, the limit order you placed to buy was above the ask and far enough above the ask that market movement in the 30 seconds or minute it took you to enter the transaction didn't bring the limit below the ask?

What broker? Can you ask them where those recent transactions you are comparing went? Is one showing a price improvement while the other is not.

Perhaps the broker is routing the orders differently. I'd expected the marketeable limit and market order to be routed the same way, but perhaps that's not necessarily the case. The broker chooses based on aggregate data over time to find the best execution so maybe

And perhaps the fact you are are (presumably) using odd lots plays into this.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

typical.investor wrote: Wed Jan 19, 2022 1:19 pm
richard.h.gao wrote: Wed Jan 19, 2022 9:59 am
vineviz wrote: Tue Jan 18, 2022 3:58 pm
typical.investor wrote: Tue Jan 18, 2022 3:22 pm Seems like they are going to different exchanges as described above.

I would make the limit order marketable. I always do that routinely as a habit for all ETF trades (even when not necessary on highly liquid ETFs).
I concur with this, by the way. A marketable limit order should provide the best execution AND some protection against fat finger and/or flash crash risk.
Tried this and it did not work. Did a bunch of market orders and marketable limit orders back to back and the market orders always got better price execution. :confused
Hmnn. Head scratcher.

So just to confirm, the limit order you placed to buy was above the ask and far enough above the ask that market movement in the 30 seconds or minute it took you to enter the transaction didn't bring the limit below the ask?

What broker? Can you ask them where those recent transactions you are comparing went? Is one showing a price improvement while the other is not.

Perhaps the broker is routing the orders differently. I'd expected the marketeable limit and market order to be routed the same way, but perhaps that's not necessarily the case. The broker chooses based on aggregate data over time to find the best execution so maybe

And perhaps the fact you are are (presumably) using odd lots plays into this.
Yes the limit order remained above ask price the whole time. I even tried various different limits above the ask.

The broker is Merrill Edge. After speaking with customer service he basically said I should not be placing marketable limit orders.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by typical.investor »

richard.h.gao wrote: Wed Jan 19, 2022 4:10 pm
typical.investor wrote: Wed Jan 19, 2022 1:19 pm
richard.h.gao wrote: Wed Jan 19, 2022 9:59 am
vineviz wrote: Tue Jan 18, 2022 3:58 pm
typical.investor wrote: Tue Jan 18, 2022 3:22 pm Seems like they are going to different exchanges as described above.

I would make the limit order marketable. I always do that routinely as a habit for all ETF trades (even when not necessary on highly liquid ETFs).
I concur with this, by the way. A marketable limit order should provide the best execution AND some protection against fat finger and/or flash crash risk.
Tried this and it did not work. Did a bunch of market orders and marketable limit orders back to back and the market orders always got better price execution. :confused
Hmnn. Head scratcher.

So just to confirm, the limit order you placed to buy was above the ask and far enough above the ask that market movement in the 30 seconds or minute it took you to enter the transaction didn't bring the limit below the ask?

What broker? Can you ask them where those recent transactions you are comparing went? Is one showing a price improvement while the other is not.

Perhaps the broker is routing the orders differently. I'd expected the marketeable limit and market order to be routed the same way, but perhaps that's not necessarily the case. The broker chooses based on aggregate data over time to find the best execution so maybe

And perhaps the fact you are are (presumably) using odd lots plays into this.
Yes the limit order remained above ask price the whole time. I even tried various different limits above the ask.

The broker is Merrill Edge. After speaking with customer service he basically said I should not be placing marketable limit orders.
Hmmmn?

Time and again I have seen Schwab recommend it as best practice.

For example…
Here are some best practices for trading ETFs, and one of the things that we like to say there is consider using what's called a marketable limit order, for instance. It's an order that should get filled if the market doesn't move at a good price. But if the market does move unexpectedly, you're not going to end up paying an extremely high price for an ETF when you didn't really want to pay that much.
Did Merrill Edge have a rationale?
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

typical.investor wrote: Thu Jan 20, 2022 4:09 am Did Merrill Edge have a rationale?
In a market order, because there is no criteria set, the seller could be willing to come down on price to move his shares. In a limit order, because even the highest ask meets my criteria, that's what the shares will sell at.

So with a marketable limit buy I'm basically saying, hey I'm willing to pay more than what you're asking for, so why would the seller give me a better price.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by vineviz »

richard.h.gao wrote: Thu Jan 20, 2022 11:35 am
typical.investor wrote: Thu Jan 20, 2022 4:09 am Did Merrill Edge have a rationale?
In a market order, because there is no criteria set, the seller could be willing to come down on price to move his shares. In a limit order, because even the highest ask meets my criteria, that's what the shares will sell at.

So with a marketable limit buy I'm basically saying, hey I'm willing to pay more than what you're asking for, so why would the seller give me a better price.
With a marketable limit order, the seller should never see the limit price: only your broker should know that price and should never use it against you.

If my broker wasn't giving me price improvement on marketable limit orders, I think I'd look for a new broker.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

vineviz wrote: Thu Jan 20, 2022 11:46 am
richard.h.gao wrote: Thu Jan 20, 2022 11:35 am
typical.investor wrote: Thu Jan 20, 2022 4:09 am Did Merrill Edge have a rationale?
In a market order, because there is no criteria set, the seller could be willing to come down on price to move his shares. In a limit order, because even the highest ask meets my criteria, that's what the shares will sell at.

So with a marketable limit buy I'm basically saying, hey I'm willing to pay more than what you're asking for, so why would the seller give me a better price.
With a marketable limit order, the seller should never see the limit price: only your broker should know that price and should never use it against you.

If my broker wasn't giving me price improvement on marketable limit orders, I think I'd look for a new broker.
It's not that the seller sees the price it's simply the ask price already meets my criteria.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by vineviz »

richard.h.gao wrote: Thu Jan 20, 2022 12:00 pm It's not that the seller sees the price it's simply the ask price already meets my criteria.
That's your broker taking advantage of you. If Merrill can execute a market order inside the spread, they have an obligation to execute a marketable limit order inside the spread as well.

If they don't then they're earning an arbitrage profit off of their clients, or directing that profit to someone who is NOT their client. Either way it's shady IMHO.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by typical.investor »

vineviz wrote: Thu Jan 20, 2022 1:24 pm
richard.h.gao wrote: Thu Jan 20, 2022 12:00 pm It's not that the seller sees the price it's simply the ask price already meets my criteria.
That's your broker taking advantage of you. If Merrill can execute a market order inside the spread, they have an obligation to execute a marketable limit order inside the spread as well.

If they don't then they're earning an arbitrage profit off of their clients, or directing that profit to someone who is NOT their client. Either way it's shady IMHO.
With a market order the ask price meets your criteria too.

Anyway, I won't accuse Merrill of being shady because they are too credible for that. I suspect they simply aren't routing a marketable limit order to the same place they route market orders.

I too would look for another broker to get price improvement. Not because it's such a tremendous amount, but because I wouldn't want to be placing market orders on such a thinly traded ETF. There is too much potential on a larger order to run into an unfavorable price.
Merrill does not receive payment for order flow from liquidity providers to which we route our customer orders in equity securities. Merrill receives rebates from, and pay fees to, certain registered securities exchanges for providing or taking liquidity on those exchanges, according to those exchanges' published fee schedules approved by the SEC.
I will guess, and it's only a guess as I have no firsthand knowledge, that Merrill is not routing the marketable limit order to a liquidity provider who might offer price improvement, but rather is directing the order to an exchange. Since your marketable limit order is providing liquidity, then perhaps Merrill is receiving what you ordinarily would have if the trade were routed to a liquidity provider. Just my guess here ...

Merrill I think prides on good execution but perhaps marketable limit order is not their forte.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

typical.investor wrote: Thu Jan 20, 2022 2:02 pm
vineviz wrote: Thu Jan 20, 2022 1:24 pm
richard.h.gao wrote: Thu Jan 20, 2022 12:00 pm It's not that the seller sees the price it's simply the ask price already meets my criteria.
That's your broker taking advantage of you. If Merrill can execute a market order inside the spread, they have an obligation to execute a marketable limit order inside the spread as well.

If they don't then they're earning an arbitrage profit off of their clients, or directing that profit to someone who is NOT their client. Either way it's shady IMHO.
With a market order the ask price meets your criteria too.

Anyway, I won't accuse Merrill of being shady because they are too credible for that. I suspect they simply aren't routing a marketable limit order to the same place they route market orders.

I too would look for another broker to get price improvement. Not because it's such a tremendous amount, but because I wouldn't want to be placing market orders on such a thinly traded ETF. There is too much potential on a larger order to run into an unfavorable price.
Merrill does not receive payment for order flow from liquidity providers to which we route our customer orders in equity securities. Merrill receives rebates from, and pay fees to, certain registered securities exchanges for providing or taking liquidity on those exchanges, according to those exchanges' published fee schedules approved by the SEC.
I will guess, and it's only a guess as I have no firsthand knowledge, that Merrill is not routing the marketable limit order to a liquidity provider who might offer price improvement, but rather is directing the order to an exchange. Since your marketable limit order is providing liquidity, then perhaps Merrill is receiving what you ordinarily would have if the trade were routed to a liquidity provider. Just my guess here ...

Merrill I think prides on good execution but perhaps marketable limit order is not their forte.
I agree it's probably a routing issue since I also get a better price with market orders vs unmarketable limit orders (my first post in this thread).
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by senex »

OP, you may be witnessing a subtle issue related to retail execution quality agreements.

Brokerages are required to report price improvement given to market orders. For instance, https://www.schwab.com/execution-qualit ... statistics

My understanding is that brokers also maintain price improvement targets for limit orders, but those targets are less aggressive than for market orders. (Not sure why; probably a bunch of reasons). Note their targets also vary with order size & liquidity of stock.

Thus, on a $0.20 spread, their target for market orders may be midpoint, while the target for limit orders might be 3/4 across the spread. Such a thing seems consistent with your experiment, and with things i've heard and tried myself.

Some people find it sketchy. I don't. The world doesn't "owe" price improvement to anyone. Brokerages are businesses providing a service. The nitty-gritty on pricing may be weird or complex or opaque, and there are probably dumb+unintended consequences, but in the big picture, retail execution quality in the USA is extremely good.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

senex wrote: Thu Jan 20, 2022 3:16 pm OP, you may be witnessing a subtle issue related to retail execution quality agreements.

Brokerages are required to report price improvement given to market orders. For instance, https://www.schwab.com/execution-qualit ... statistics

My understanding is that brokers also maintain price improvement targets for limit orders, but those targets are less aggressive than for market orders. (Not sure why; probably a bunch of reasons). Note their targets also vary with order size & liquidity of stock.

Thus, on a $0.20 spread, their target for market orders may be midpoint, while the target for limit orders might be 3/4 across the spread. Such a thing seems consistent with your experiment, and with things i've heard and tried myself.

Some people find it sketchy. I don't. The world doesn't "owe" price improvement to anyone. Brokerages are businesses providing a service. The nitty-gritty on pricing may be weird or complex or opaque, and there are probably dumb+unintended consequences, but in the big picture, retail execution quality in the USA is extremely good.
That makes sense. With limit orders I am technically giving the broker additional instructions which may require more work on their part.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by vineviz »

senex wrote: Thu Jan 20, 2022 3:16 pm
Some people find it sketchy. I don't. The world doesn't "owe" price improvement to anyone.
True but brokers DO “owe” their clients “best execution”.

If, indeed, Merrill is able to routinely get better pricing on a market order but not marketable limit orders of similar size then I think it’s legitimate to question whether the broker is meeting this obligation.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

I found the latest routing report for Merrill Edge.

Merrill Lynch Pierce Fenner & Smith Inc. - Held NMS Stocks and Options Order Routing Public Report

Image

I don't know if negative numbers mean they are paying or getting paid, but there is a difference between market orders and limit orders.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by typical.investor »

richard.h.gao wrote: Thu Jan 20, 2022 5:35 pm I found the latest routing report for Merrill Edge.

Merrill Lynch Pierce Fenner & Smith Inc. - Held NMS Stocks and Options Order Routing Public Report

Image

I don't know if negative numbers mean they are paying or getting paid, but there is a difference between market orders and limit orders.
That's quite different from Schwab.

Schwab is getting roughly $0.10 (per hundred shares) for both Market Orders and Marketable Limit Orders and $0.33 (per hundred shares) for Non-Marketable Limit Orders.

So yeah, your Marketable Limit Order is not getting routed the way mine is. Anyway, I am confused as to why a Market Order would execute at a better price than a Marketable Limit Order for you.

https://content.schwab.com/drupal_depen ... Report.pdf
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

typical.investor wrote: Thu Jan 20, 2022 2:02 pm
Merrill does not receive payment for order flow from liquidity providers to which we route our customer orders in equity securities. Merrill receives rebates from, and pay fees to, certain registered securities exchanges for providing or taking liquidity on those exchanges, according to those exchanges' published fee schedules approved by the SEC.
I will guess, and it's only a guess as I have no firsthand knowledge, that Merrill is not routing the marketable limit order to a liquidity provider who might offer price improvement, but rather is directing the order to an exchange. Since your marketable limit order is providing liquidity, then perhaps Merrill is receiving what you ordinarily would have if the trade were routed to a liquidity provider. Just my guess here ...
I looked at a bunch of other routing reports and they all show positive numbers for the net payments. That means Merrill is correct in saying they not only don't receive order flow payment but they are paying the exchanges for taking liquidity.

Marketable orders remove liquidity. Non-marketable orders add liquidity. So they are still getting paid when adding liquidity.

This implies Merrill should be getting the best execution compared to other brokers because they are not making money off clients by routing orders to third party market makers.

And it sort of explains why I am getting better price on market orders vs marketable limit orders as they are paying significantly more on marketable limit orders.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by vineviz »

richard.h.gao wrote: Fri Jan 21, 2022 1:54 am And it sort of explains why I am getting better price on market orders vs marketable limit orders as they are paying significantly more on marketable limit orders.
This doesn't explain WHY they are providing different executions on marketable limit orders and market orders, since both orders have the same liquidity impact. They are both marketable, after all.

It sounds like they may be routing all limit orders to the exchange regardless of whether they are marketable or not, which is probably not in the client's best interest.
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by richard.h.gao »

vineviz wrote: Fri Jan 21, 2022 2:40 am This doesn't explain WHY they are providing different executions on marketable limit orders and market orders, since both orders have the same liquidity impact. They are both marketable, after all.

It sounds like they may be routing all limit orders to the exchange regardless of whether they are marketable or not, which is probably not in the client's best interest.
Looking at BofA Securities, not sure why nothing is listing for stocks, but for options they receive no payment for market orders, do receive payment for marketable limit orders and it's a mix for non-marketable limit orders. So that sort of explains the behavior I'm seeing, the best price on market orders, the worst price on marketable limit orders and an inbetween price on non-marketable limit orders.

Image

https://business.bofa.com/en-us/content ... ution.html
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Re: Getting better price with Market Orders instead of Limit Orders on ETF?

Post by senex »

vineviz wrote: Fri Jan 21, 2022 2:40 am This doesn't explain WHY they are providing different executions on marketable limit orders and market orders, since both orders have the same liquidity impact. They are both marketable, after all.
I agree. I wonder if it is due to some second-order effect related to limit orders "carrying their weight."

i.e. If Merrill only accepted market orders, the complexity of their computer/routing/software/etc would be lower than what is required to process limit orders. Since limit orders, on the whole, add cost to their operation, maybe they take some of those costs out of the price improvement given to such orders.

Just a hypothesis.
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