Trading Limit orders-- utility of placing better than MID-price numbers in order entry

D

delta20

I notice that some traders when they place a limit order for a spread, place it slightly better than the MID price, in the hope of getting a better fill. Does this strategy really work out getting favorable prices, or is this just a wash , meaning small number of these orders get filled and the majority dont ?

I am mainly referring to Index option trades ( SPX, RUT) which are tightly controlled prices with a narrow spread between the bid and the ask, just curious if there are any studies which have looked at this practice, or do you come out about the same, if you place a limit order for a spread AT the MID price offered ?
 
skalmadi said:
I notice that some traders when they place a limit order for a spread, place it slightly better than the MID price, in the hope of getting a better fill. Does this strategy really work out getting favorable prices, or is this just a wash , meaning small number of these orders get filled and the majority dont ?

I am mainly referring to Index option trades ( SPX, RUT) which are tightly controlled prices with a narrow spread between the bid and the ask, just curious if there are any studies which have looked at this practice, or do you come out about the same, if you place a limit order for a spread AT the MID price offered ?
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If you're usually wrong about the direction of price movement, mid price limit orders will get you filled at a better price. If you perfectly time tops and bottoms, then you'll never get filled.
 
In some cases, hitting an exact entry price doesn't matter all that much. E.g., if you're trading reversals and you see a hard pivot, the key element is time; you need to get in right now, regardless of the price. In other situations, it's critical: if you're buying $1-wide flies and looking for a pin, the difference between 0.01 and 0.10 isn't just 9 cents - it's a ratio of 99:1 vs. 9:1. So it can definitely be situation and instrument dependent. I will say that, in trading options, doing price discovery has made me thousands of dollars in addition to the return from the trades being successful - or let me get out with a reasonable/minimal loss when it went against me. I'm very much a believer in it, especially with any multi-legged trades in volatile underlyings, and have had some ridiculously, unbelievably good fills time and time again.

But in general, trades are like trains; if you miss one, another will come along soon. Also, sooner or later, you'll run out of margin/have all your capital committed - and good setups will keep coming by. So - basic game theory - if X is your chance of entering every single trade and Y is the opportunity to enter a trade at a better than average price, it makes sense to privilege Y over X.
 
I've collected test data on this from thousands of trades using an algorithm and software I developed to try and optimize order fills. The punchline is that there is no free lunch. Market makers are way ahead of you. Getting a better price is not nearly as simple as just getting into the right place on the order book. I could write an academic paper on all the details but your best strategy is to move in and out of positions as slowly as possible. Where you set your price within the spread does not matter as much as you may assume at first.
 
swinging tick said:
Excuse my ignorance, but how exactly does moving slowly in and out of positions contributes to better fills?
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Are you asking why it works or are you asking how I know it works? I know it works through many test orders and measurement of my order fills. The reason it works can not be measured. It is likely a function of how other algorithms are choosing to provide liquidity. 100% of actual demand never appears on the order book. If you take a little liquidity you will find that more soon appears.
 
FreeGoldRush said:
Are you asking why it works or are you asking how I know it works? I know it works through many test orders and measurement of my order fills. The reason it works can not be measured. It is likely a function of how other algorithms are choosing to provide liquidity. 100% of actual demand never appears on the order book. If you take a little liquidity you will find that more soon appears.
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Thanks! Thats what I was asking.
Did your tests indicate if this entry/exit approach apply equaly to both reversal and continuation strategies? I mean, is it just a matter of better spread/slippage due to higher liquidity, irrelevant of market direction?
 
I'm not aware of any correlation to recent price activity but you could certainly study that as well. For an individual this is really only important for illiquid small caps where you may be buying or selling more than 0.1% of the daily volume. In these cases split your order into small pieces and enter them with plenty of time between each order. On average you will likely do slightly better than just putting in one big order.
 
Major caveat: I'm referring only to entering/exiting positions for swing trades or long term positions. If you are day trading chart patterns then none of this applies. You will be timing your entry/exit points and will have to take whatever liquidity is available.
 
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