Market Order

A market order is an order issued by the account holder to a broker to buy or sell a certain amount of assets on the trading platform. A market order is executed immediately at the best price available on the market.

A market order necessarily contains information about the volume of the transaction being concluded, does not specify the price, but at the same time contains an order for the immediate conclusion of the transaction.

Note: Since the price is not specified in the order, the market maker does not include it in the order book. In order to execute an order, it is combined with the current limit orders at the best available price.

How Is a Market Order Executed?

First, the trader submits a buy/sell order to the broker, indicating the transaction volume, and then this order will be executed against the nearest counter limit order at the price indicated in it.

Note: The market buy order will be executed at the ask price, while the market sell order will be executed at the bid price.

Visually, on the order book chart, buy orders are usually placed in the upper half, and sell orders in the lower part.

What Difficulties Can a Trader Face When Trading a Market Order?

Only in a sufficiently liquid market is a market order easily executed and gives the best price in the order book. The following condition must be fulfilled here: the volume of counter bids at the best price must be equal to or exceed the transaction volume specified in the order.

For example, a trader places an order to purchase 20 lots of shares of company A. In the order book, the best ask price is $1,000, and the total volume of orders is 20 lots. This trader’s request will be fully satisfied, meaning 20 lots of shares will be purchased at $1,000.

This is an ideal option, and even in very liquid markets, this situation may not always be the case.

There may be situations such as:

Slippage.
Partial execution of the order.
Walking the book.

Let’s look at these situations in more detail.

Walking the book and executing it at a worse price than the initial one. This situation may occur when the total volume of limit orders is less than the market order volume. In this case, the market order will be partially executed at the best price in the order book, and then continue to execute across other orders until the transaction is completed in full.

For example, a trader places a market order to buy 10 lots of shares of company A. The best ask prices in the order book are as follows:

$1,050 — 10 lots.
$1,025 — 3 lots.
$1,000 — 6 lots.

The execution sequence of such an order will be as follows:

Purchase of 6 lots at $1,000.
Purchase of 3 lots at $1,025.
Purchase of 1 lot at $1,050.

The market order is fully executed, and the trader has received all 10 lots, but their average price is $1,012.5, which is very different from the initial best price. The current quotes have also changed, and the best ask price is now $1,050.

Note: Walking the book in markets with low liquidity leads not only to a purchase at a significantly worse price than expected, but also increases the total cost of the transaction, along with brokerage commissions and exchange fees.

Slippage. It has the same nature as walking the book, but the causes are different.

Most of the orders arrive at the exchange via ultra-high-speed communication channels, but some time (possibly seconds) passes between the trader’s order submission and its execution.

Thousands of traders participate in trading on each platform. By the time the market order is executed, some of the limit orders that were visible to the trader before placing the order may already have been filled. As a result, the deal is executed at a worse price than the original one.

For example, in the scenario above, before the market order in question, two other traders submitted orders for 9 lots. Of course, they will be executed in order of priority, and our trader will still buy his shares, but at a price of $1,050.

Note: Slippage is also found in liquid markets, but its level will be insignificant due to the density of orders and their large number. In instruments with low liquidity, it can amount to tenths or even whole percentages.

Partial execution of a market order. This situation occurs rarely, but it can happen when trading instruments with very low liquidity.

For example, a trader wants to purchase 10 lots of company A shares, but liquidity is very low, and the only counter offer is for 5 lots at $1,000. In this case, the market order will be partially executed for 5 lots.

The remaining balance will be transferred into a limit order at the last price and placed in the order book. As a result, the trader receives 5 lots of shares and a limit order for 5 more lots at $1,000 each.

Note: The remaining limit order stays active until execution, as limit orders are not automatically deleted from the order book. They must be cancelled by the trader.

Using a market order is generally less advantageous than, for example, placing a pending limit order. A pending limit order is executed at the best or specified price, while a market order is executed at the current or worse price. Due to slippage or walking the book, both the transaction amount and commission costs increase. Therefore, it is recommended for beginners to work with limit orders, using market entry only rarely.

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