Please help me understand bid/ask and limit orders

[traderzhang]

This is how I understand it. Please correct me where I'm wrong.

When I place a buy limit order, it goes on the order books as a bid. When I place a sell limit order, it goes on the books as an ask.

If a stock has a bid of 10.02 and ask of 10.04, and I want to buy the stock, I can either buy it with a market order at the ask (10.04) or put in a limit order at the bid (10.02), or a little bit higher (10.03) to get in front of the line. If my limit order is 10.03, it's only guaranteed to fill if the ask comes down to 10.03, however, people who are looking to execute market orders to sell can be matched to my 10.03 bid (before all the other bids at 10.02), in which case I will buy at 10.03.

Is this how it works in a nutshell?

 

[zdreg]

correct.

 

[traderzhang]

correct.

So why would people submit market orders when they can get limit orders filled at a better price?

 

[p0box4]

So why would people submit market orders when they can get limit orders filled at a better price?

Because a limit order doesn't guarantee a fill.

 

[traderzhang]

for a very liquid stock like NVDA, if you submit a limit order at the "last" price (outside the first 10 minutes), what are the chances it won't get filled.

 

[FSU]

correct.

Not really correct.

There are many different exchanges. You can be first in line on one exchange and it can trade at your price on any another exchange and you won't be filled. In the OP's example, with a 10.02 / 10.04 market, you can place a 10.03 offer in and you won't necessarily be filled if someone pays 10.03.

 

[zdreg]

So why would people submit market orders when they can get limit orders filled at a better price?

no guarantees.

 

[ajacobson]

A trade-through occurs when an order is executed at a worse price than the best price available, essentially trading through or bypassing the better market price. Trade-through shouldn't occur in typical market conditions, by regulation, orders must be routed to the best price.

Same concept as NBBO and linkage in options.

ITS system would not allow trade through with a few exceptions - generally what is called a "flashing quotes" condition and it applies to both lit and dark markets. You'd light up the SIP like a Christmas tree. There are exceptions. Your broker would owe you a correction or a conforming fill. Price improvement and Trade Throughs give you the same result, but one is exchange performance and one is broker performance.

Read up on the Trade Through rule if you want to better understand the rule.

Limit orders are price-sensitive and market orders are time-sensitive.

 

[murray t turtle]

So why would people submit market orders when they can get limit orders filled at a better price?

%%
LIKE A J noted in #8 .
And a market moving well or fast, a limit order may never get filled;
, so now its a much worse price\ with much less profit\ or bigger loss.
I also like resting limit orders, which tend to get hit, especially on open price ;
i seldom or never trade open with market ordersLOL
A much smaller reason to use market order$, top trader said 'brokers love me, i use market orders'' LOL
ON cash metals i all ways use market orders, but that'$ somewhat of a big bid\ ask profit on small volume business deal. Good question

 

[lindq]

So why would people submit market orders when they can get limit orders filled at a better price?

Because it isn't a perfect world.

For example, yesterday I missed what would have been a great trade if I'd used a market order, guaranteeing a fill, on a highly liquid ETF. But I went for a limit just a few cents below the opening print. It never filled. Then the stock took off without me and ran hot all day and I missed a 5% move.

It happens. With a limit order you take your chances.