Market and limit orders: what speed costs you

The two main order types differ in one respect: what is fixed — the fact of execution or the price. Fixing both is impossible.

The market order

It fills immediately at the best available prices on the opposite side of the book. It guarantees execution and guarantees nothing about price.

In a liquid security the gap between the expected and the received price is negligible. In an illiquid one a large market order eats through several levels of the book and fills at an average price noticeably worse than the top line of the quote.

{{figure:order-book|caption=A large market order walks several levels of the book and receives an average price rather than the best one}}

The limit order

It fills only at the stated price or better. It guarantees price and guarantees nothing about execution. The order can sit all day and be cancelled in the evening.

When each fits

Market orders suit the case where getting in or out right now matters and the security is liquid. Limit orders suit the case where price matters more than speed — and always in securities with a wide spread.

What else exists

Stop orders activate when the price reaches a set level and then become market or limit orders. They offer no protection against a gap: if trading opens well below the level, the stop triggers at the new price rather than the one you set.

A practical rule

The wider the spread and the smaller the daily turnover, the fewer reasons to use a market order. On judging that width, see Liquidity: noticed only once it runs out; on the book itself, The order book: what is visible in it and what is not.