limit orders

thanks to paul and leroy i have some more insight into limit orders that i really never gave much thought to. really good stuff. so now when i make a trade i will have to weigh in some more decisions.

one thing though i have thought which could be way off base is that on thinly traded stocks, alot of what i buy, a market order sets me up to be taken advantage of. you see the specualtors have to fill alot of these and they will make partial fills unless you have fill or kill order in, and drive up the ask and then you get stuck. is this correct? with a limit order on these stocks they know exactly only what they can get and can take it or leave it. also with small stocks it seems that they tend to accept lower prices to get out themselves as its hard to move a bunch of stock. these things and others make me trend toward a limit order. but if i am missing out on upward trends because of doing this maybe i need to reconsider what seemed too obvious to me. thanks.

A limit order gives the market maker the option to screw you. It's like giving an open order in the morning for Bal -6 when it is at -6.5 or -7. You probably won't get filled, and will typically get it only after the line drops to -4.5. I recommend you submit only marketable limit orders that split the bid-ask spread and have a good chance of timely execution.

The thing with thin stocks is the orders the market-maker is leaning on could be thin, distant, or non-existent. He may, in fact, just be pegging his offer a half point above the most recent print! Or he may even be the seller.


If he is offering 1,000 at 21, he could be leaning against a client with 40,000 for sale at 22. In this case, with the nearest seller at 22, 21 is a bargain - regardless of whether there is a buyer above 20. I mean, why are you buying, obviously not because you have anyone but yourself to lean on immediately!


If his nearest seller is 22, or may not sell for days, or is merely a theory rather than any paper in his deck, note that YOU ARE THE BID. So when you buy at his price, you are buying on the bid. Sure, sometimes he may have proximity to an offer at 20 3/4, but how are you going to get access to it?


There is nothing "fair" or worthwhile to chase after at the midpoint between the bid and ask, it is just silliness, trust me. If you don't want it at the offer for tour own reasons, it is hard to see how you could want it "at the mid" - seeing as the orders the bid is leaning on may be dollars lower, and you can't get first grab at them anyway.


Are you leaning or buying? Because good luck leaning. They'll just pick you off.


elroy

I don't rule out the possibility of improving execution by judicious use of limit orders. For example, the spread can sometimes be too large to pay.


Also, execution via limit orders can be superior to market orders if you can place your limit orders with a brokerage firm that does a lot of internal order matching in the stock you're trading and a large percentage of its market orders (in that stock) are placed by naive (rather than sharp) clients.


Here's an example (that's probably more favorable than what you can hope for): back when NASDAQ still quoted in fractions, while some ECNs quoted in decimals, I used limit orders to trade one particular stock with Brown & Co. and got tons of fills at the NASDAQ quote that were outside the best bid and ask available on the ECNs: the NASDAQ spread couldn't get tighter than 1/32 while the ECN spread was typically one cent and sometimes less. For example the best ECN quote might be .31 x 5/16 and I'd fill my buy order at 9/32 or the quote might be 9/32 x .29 and I'd fill my sell order at 5/16. With fills like these, I accumulated a ton of shares at a negative cost.


... Note that this also means that Brown & Co. didn't give its clients the best possible execution on their market orders. This is something you must be wary of when you're selecting a broker. It's possible that this is less of a problem now that NASDAQ quotes in pennies. Then again, some ECNS accept bids in mills so your broker could still fill your order at 0.9 cents worse than the best price available.

Those guys on Island had your bid - or the Brown bid, or the bid Brown was pegging to, or the bid of whomever was carrying your order or leaning on your order - right on their screen!


Sure, you get some tradethroughs, or else you wouldn't be there - obviously the only reason to submit to friction or publish at a market center is to win tradethroughs.


But the purpose of Island is to lean on those market centers, to front-run them by a penny. Because every fill they get is free money. Why? Because, believe me, if they wanted to hit your bid they could, in a fraction of a second, much faster than anyone else could hit it or you could cancel it.


So the fact that they are there is irrelevant to you, because you weren't arbing against them or leaning on them were you? Sure, you could hit them if they let you, if they had someone else to lean on. But again, this is adverse selection, where you get paid half a cent to sit there like a backstop, waiting to be picked off when, in reality, the Island guys have it all over you.


Or something like that. Point is, the Island guys were getting a better deal, and you were the one giving it to them. You weren't getting instant free money, because I doubt you ever sold to them once - nor could you have if you wanted to. I'd pay you a half cent to have friction on you all day. You'll be buying the offer in a second. How am I wrong?


eLROY

You're right that ECN traders (of which I was one, in another account) were counting on bailing out onto the fractional NASDAQ quotes. But the ECN traders couldn't lean on me personally: size at the 32nds was huge (e.g., 340,000 @ 9/32 x 430,000 @ 5/16), and if that started disappearing I could pull my Brown order. But I'd get filled on Brown when the size was holding, which was very nice.

"I recommend you submit only marketable limit orders that split the bid-ask spread and have a good chance of timely execution. "


funny, it had never occured to me that one would put in a limit order other than on or in between the bid/ask spread.