how then

how then do i buy say 1000 shares of a thinly traded stock? if i put in a market order as you seem to imply then it gets filled like--100 shares at 20, 100 more at 20 1/4, 200 at 20 3/4, etc.

if i fill or kill then they dont have all the shares right then and it never gets filled.

but if i put a limit order in then maybe they have enough time to put together the sale. am i wrong here? at least i have some control over where my price is.

Although I agree that limit orders don't offer the improved execution that they appear to, I disagree with the assertion that they can never offer improved execution.


For one, I don't buy the no-arbitrage argument that you can't benefit from a limit order because if there was a benefit, someone else would already have taken advantage of it. This is basically the old joke about the finance professor who sees a $100 bill lying on the ground but doesn't bother to pick it up because if it really was, someone else would have already picked it up. I know this isn't true from personal experience (and I know some people who have been big multiples on the wrong side of this "trade".) If $100 bills are being dropped, there's a chance you'll be the first one who can grab it. (Furthermore, the no arbitrage argument was decisively refuted by Sanford Grossman in his paper "On the Impossibility of Informationally Efficient Markets" back in 1980.)


The thing is, if you want to improve your execution, you're probably going to need to do your own research. It's kind of like deciding whether or not to play AJo under the gun: just because someone else loses heavily with the hand doesn't mean you should always fold; it's more important to know how well you play compared to your opponents from the flop on. Similarly, with limit orders vs. market orders, you need to consider your situation. Do you pay per share or per trade? Are you willing to adjust your order as the broad market moves (or would you prefer to place an order and leave it)? How does your broker operate?


There are many ways to buy (or attempt to buy) 1000 shares of a thinly traded stock. In addition to placing a market order for 1000, or a fill or kill for 1000, you can (a) submit a limit order above the offer, filling at least some of the order at the current ask, (b) break your order into pieces (you want to pay per share to do this), (c) duplicate the inside bid (if there's a chance you'll fill on a naive internal match), (d) bid below the inside bid at or just above a level where you think there's a lot of support, etc.


Ideally, you would like to do some actual experiments to determine which alternative is best, but, as with poker, you can at least try to apply logic to your knowledge and beliefs about the situation.

Instead of a Fill or Kill order, you could

put in an All Or None order. AON


It can be at a limit or at the market.


This means they must sell you, say, a 1000

shares or nothing.


Unlike a Fill or Kill, it remains on the books until you cancel.

In theory, the volatility over time in a stock should be proportional to the immediate spread.


The asymmetry in information and opinions should be similarly scattered.


So when you say "thin" you are only talking in relative terms.


If you have two stocks which you expect to rise 10 points from the offer, and one has twice the spread of the other, is it possible you should always buy the one with the narrower spread? Because you expect it to move more? Or are your ideas simply twice as outrageous?


All I'm trying to say is that even though the margins relative to price stay fixed - so that you have to put up the same money for the big-spread stock and the small-spread stock both trading at 10 - you're actually getting more bang for your buck in the big-spread stock. And spread is relative to bang.


Meaning, you don't compare the 1/4 spread in one stock to the 1/2 spread in another stock, you compare a stock only to itself. If one stock has a 1-cent spread, that should not distract you from buying the offer in a totally different stock you know something about. Not unless you're choosing between competing opportunities. But you shouldn't try to pry an extra half out of one stock just because another stock has a narrower spread, and it isn't "fair."


Moreover, if you move the stock a 1/2 point just to fill your thousand, you only have to have one guy with 100,000 shares "discover" the stock, and you're off to the races. Market impact is huge because not that many people disagree. You should be encouraged by how few people disagree with you, to chew through, if you are right.


And of course I don't got for that it-can't-be-a-dollar-on-the-sidewalk bit.


And I gave quite a bit of second thought to my second "proof" and still stand by it. The thing that bothered me is that you had asymmetric information, to the extent you knew you were a buyer at 21, and the market maker didn't know this or he might have bid for 1,000 at 20 1/2 to sell to you. But, in reality, you're not a buyer at 21 if you're not buying at 21, you think it is a bad price. Or something.


Plus, let's pretend you somehow knew with certainty the stock would go to 40, only you weren't sure exactly when, wouldn't you grab the offer then? My point is that if you are choosing your price based on some combination of the immediate, public bid and ask, and your own unique opinion, that you might as well throw out the symmetric-information part. Plus there are some other ways of looking at it which I forgot.


So far as you making money on limit orders at Brown - and people using market orders apparently "losing" at your expense - my only point was that any "expected" profit was not created by limit orders, but rather by asymmetric friction. A lot of people made fortunes day-trading like that, but most of the ones I know lost most of it - though it's picked up again a little since 9/11.


I think that the assumption a market order is losing and your limit order is winning is usually very suspect, even if the spread hasn't moved. It may be skewed. You may have "learned" a strategy which works, but inevitably takes equally long to unlearn when it stops working.

At most, you are both winning, unless you have happened upon some very fleeting or lucky situation - which plenty of people have, and of course they instantly throw infinite money at it (like the proverbial broken slot machine at Stardust that gives you 2 credits for every quarter you drop in).


Maybe I should have said that, yes, some traders have made money using limit orders. But you should be aware when you are investing and trying to trade at the same time. People should realize that, if even they are making money investing, they are often losing money trading at both ends. There was a great deal of this in 1999, people who could use limit orders and still win, which is why ECN-types mase so much money. The only way to be safe, as an investor, is to use a market order.


When you use a market order, in most systems and microstructures around the world, you will get a fair price given everything that competing market-makers know. When you use a limit order, it's usually just a matter of the guy with the lowest friction winning the battle to screw you.


As an investor, if you can't beat the spread and make money, you probably shouldn't be buying. If the spread swallows your edge, that is just saying "I could sell at 40, that is the right price - if only there were one other guy on Earth who knew that to buy from me." There are no fair or correct prices, only individual buyers and sellers. You only attempt to buy mid-spread if you know of a seller. Anf if you do know of a seller, maybe you should be selling short.


This post has gotten too long, and I haven't even made my point yet. Oh, well, I forgot what it was...


I guess it was that, if Ray knows of some buyers and sellers, he should try to match them off. But if somebody thinks there should be a seller at 20 1/2 to mirror your buy, just because the market-makers at 20 and 21 are mirrored, that is silly. I'm lost...


leroy

Suppose offered at 21. You are buying 3,000.


Limit-bid for 500 or 1,000 at 20 7/8, see how fast it gets hit.


If it takes more than 10 minutes, buy the whole pile at the nearest offer.


If it gets hit instantly, wait a half hour, try again.


lorry

The problem with limit orders is that it's a parlay bet. When you buy a stock, you're hoping the price will go up. But when you buy it on a limit order, you're hoping it won't go up until you've bought it. So you're betting on a pretty specific scenario, namely that the price will hold or go down for a bit, then go up. You need to win two ways rather than one.


It doesn't really matter what price you pay for a stock, as long as the price keeps going up after you buy it. So if you get 100 @ 20, then 100 @ 20 1/4, 200 @ 3/4 etc that's fine as long as the price keeps going up. When you finally sell, you might not make as much as you would have liked to, but you will make as much as you were ever entitled to.


But even if the price doesn't keep going up, a limit order offers no protection. It could well get filled on the way down.


Your best way to minimize exposure on a trade is with stops not limits. Carefully-placed sell stops can lock be used to lock in profits and/or minimize losses. But I'm with eLROY in that you should just about always use market orders for your initial trade.


Having said that, I will add that I make exceptions in certain situations. If I expect the market to be extremely fast, as is often the case with IPOs, I may figure that my risk becomes too high above a certain price point, and in that case I will use a limit order. But for run of the mill trades, no.


TRLS

but the price doesnt have to move for your limit order that is say in between the bid and ask price. all you need is someone with the stock to want to sell it. plus if you let them fill parts of your order you are guananteed to pay higher prices on the rest of it.

sure if its a high volitility stock and you think its going to skyrocket soon, you should buy right now and not miss out, but i dont know anyone that is this smart. so far one one has showed that saving that 1/4 or 1/2 point which is several hunderd dollars on even smallish sized transactions, really costs you money. as i find that the sale almost always goes thru right away. this shows to me that the market makers that are putting up a spread will usually take a little less. forget about the theory behind it all, which i understand much better now, this is what i see happens.

Okay, so you're saying the market-makers have some for sale they're not showing. And this is the stock you want to hit.


Now suppose they published some of this stock behind. Would you then not want it? Would you then bid below that? Is hidden stock more valuable than published stock? Does publication of an offer taint it?


You can't argue with experience. But I think Kim was suggesting that, when a stock is so precarious that people are afraid to even publish 1,000 shares for sale - and usually it is much mroe behind if anything - that's the last time you want to stick your neck out with a limit.


They keep some back in case a really outsized buyer shows up, so they don't get picked off. But they can unwind yours in about 10 minutes, so maybe they take it. Sure.


Another thing, you said what if somebody takes my bid but the price doesn't move. Huh???? There is no "the price" - what is that even supposed to mean?


When you place a bid, and somebody hits it, all you're really saying is that you for some reason like it when your bid is published a second before their offer, not vice versa. If they publish their offer a second before you, you don't want it.


But usually they wouldn't publish it anyway, Why? Because they are lurking, with much more than 1,000, to pick someone off.


If your limit orders get filled so easily, it is also possible that you are either wrong, or you're too soon a lot of the time. If you think a stock is going to be sitting around a while, maybe you should put your money to work somewhere else, and wait for what you are predicting to start happening.


In general, when you wait to actually see it, you feel the cost of the 1/2 point you missed - like an idiot - in something you predicted. But what you don't feel is that your frequency of being right goes up way more to compensate this. And you also don't feel the joy of the the times you were wrong but didn't take it.


But now I've veered into trend trading, which I would love to post about all day, but I'll spare you.


eLROY

My last post dealt with how, seeing as you like to publish - and you have none behind - chances are the guy who doesn't publish is bigger than you, or something. He is banking on maintaining the illusion that "the price" hasn't moved.


But there is a much more dangerous reason why someone might make more money and get filled more often using limit orders: IF THAT PERSON REFUSES TO PAY UP WHEN HE IS RIGHT!


If Stock X is at 10, and I predict it go to to 20, but for some reason it goes to 12 before I can get filled, I should be happier to pay 12 than 10, because it seems more likely I am right.


But some people deprive themselves of any price above "the price" - the "fair" one where the stock was trading when they first made their prediction and started trying to buy.


What this refusal accomplishes is to make a person less likely to buy when he is right, and more likely to buy when he is wrong. One incorrect way to overcome it is to always start trying to buy early. That way, you get in with less weighting to when you are wrong versus right, and you don't suffer the pain of paying up.


Rather than trying to buy at a stage when whether you get filled or not is not corrolated to subsequent performance - and may be inversely correlated - you should...


you get the idea...


larry

you need to give yourself at least 10 minutes...without walking away from your screens. it depends how many shares you want to buy versus how liquid the stock usually is. assumng you want to buy 5000 shares, and the stock can move on 2500 shares, I would do this :


if the market is 20/20.5, then put in a limit order for half your amount at 20.5 (don't show your whole hand). whatever is not filled within 1 minute, cancel it. if the market is higher and you are not filled on your 2500, then think about whether or not you really want the stock, if you really want it (actually, you should've thought about this beforehand), pay the offer again for the balance of the 1st half...if you get filled on the first 2500, and the market is unchanged, then there's a higher chance the stock is going down than up in the very short term (this of course assumes the assumptions above that the stock can move on 2500 shares...this is not INTC we're talking about)...and then wait 10 minutes and execute the balance of the other half....if you had gotten filled on your original 2500 and it is still offered at the same level, there's a good chance you will get a lower price on the next 2500 ... if you had to chase to fill your 2500, then you give them a little breathing room ... they can't see you, 10 minutes may be enough for them to think you aren't coming back for more, and thus you get a higher chance the stock is back to a fair price rather than them waiting to rip your head off.