bad advice on NOT paying the spread?

[TD877]

I've done a lot of reading online, and some advice I've seen repeated says that we can avoid paying the spread by placing limit buy orders on the BID, and limit sell orders on the ASK. Advice goes on to say the only downside of this strategy is that you might not get positions filled.

My logic says this is incorrect, and if using the above strategy you: (1) still pay the spread, but do so indirectly, and (2) only get action on trades moving in the opposite direction from what you want

For instance, if XYZ bid/ask = 10.00/10.01, and I place a bid at 10.00, I'll be placed behind the HFTs and MMs. My order will only get hit after all the HFT and MM bids at 10.00 are hit or canceled, which is essentially the moment that the bid/ask would likely move down to 9.99/10.00 if I weren't participating. So essentially I'm getting my BID filled at the new HFT/MM ASK of 10.00. The only difference is that now I'm exposing myself to adverse selection, since I'll only get filled on a downward moving stock.

This scenario is based on my assumption that the NBBO bid/ask is mainly set by HFTs and MMs, not other retail traders like myself.

Please pick appart this logic if possible. I'm still trying to learn. Thanks to everyone!

 

[trade4succes]

In my experience this is mostly true indeed, but not always, sometimes you get lucky of course.

 

[Visaria]

My logic says this is incorrect, and if using the above strategy you: (1) still pay the spread, but do so indirectly, and (2) only get action on trades moving in the opposite direction from what you want

I tend to agree strongly with your analysis.

 

[Daal]

You are correct. In this type of situation (1 cent spread) is frequently better to hit the spread. There is an alternative, that is to use a inverted exchange/ECN to get filled BEFORE the guys sitting at $10. Places like EDGA, Boston, BYX offer a financial incentive for people to hit them (no fee or small payment) so they frequently get hit first

A much more complicated situation arises when the spread is large (say 10 cents or more). In that scenario using hidden orders, dark pools and other methods could be better than hitting the spread in a lot of situations

 

[cjbuckley4]

Generally, what you say is true, however the likelihood of getting filled on your bid is a function of order flow and queue position.

 

[Javier]

Thats the little price you pay for being filled on that price