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advisability of limit orders?

I've been afraid of doing etf market order buys in an IRA because there is the possibility of a surprising price turning my small cash balance there negative. I think there is a rule against that, although I once went negative without problems when I was charged multiple commissions on partially filled orders (so now I specify all-shares-or- nothing even though it can give a worse price).
Anyway some advise to never use market orders and only limit ones, even though the price can sometimes run away in the wrong direction. My problem with this is that I always seem to get exactly the limit price I specified even if the price was more favorable (lower) that entire day! This is with a brokerage which is quite good to me with market orders, and rarely gives me the worst end of the bid/ask spread.
Here is a possible explanation generous to my brokerage. They claim to turn a limit order into a market order at the specified price. As I said, the quoter has no indication of my market order which would have been listed as the worst buy price of the day. I hear the latest high frequency trick is people flooding the system with dummy quote requests which somehow lets them sniff the limit settings and trade them while the official system is frozen and unaware.
Another possible explanation is my trade is assigned from my brokerage to one of several trading companies which not all of them report back to quoting central. Anyway, just some caveats for those who think limit orders are the best way to go, especially if you can't be present at a terminal during daytime hours.
Reply to
dumbstruck

What type of limit order are you using, day limit order or GTC limit order?
A GTC limit order can be filled before or after hours at a price that never trades during regular trading hours.
A day limit order is only good during regular trading hours.
Limit orders are never turned into market orders. "a market order at the specified price" is doubletalk nonsense.
Your order fill should list the time and exchange/ECN that your order traded. You can check your fill against an intraday chart at BigCharts or Yahoo Finance.
Reply to
terrable
It was GTC, and although my transaction record lacks a time of day, amazingly (to me) it did trigger in the previous day. My brokerage doesn't explicitly document that after hours are ok for GTC. It does say after hours extend to 8pmET. I thought I issued the trade after that, but maybe because ET clocks "fell" back and not here...
Thanks. It looks like I was confusing limit order rules with stop orders. There is a strange asymmetry in stop orders. What I want is a buy-stop-gain or buy-stop-gain-limit, but only the loss side is implemented (with the conversion to market order). I think I can do this with a contingent order though.
This is a good time to take advantage of high volatility within a range when doing a sell-to-buy. Just lag that sell until the price pops and lag the buy until the price sags. Now this cycle should happen within a few days, whereas normally it would take so long it could run away and not come back. Or if you want to do the sell and buy at once to avoid runaway, you can finesse tax consequences by lagging the sell for a LOW price but then instantly (auto- contingently) buy back somewhere into the market (or vv).
Reply to
dumbstruck
OK, back to basics on the pitfalls of limit orders. Why would I complain about getting exactly the price that I specified on a limit order? Because in practice I often get that price when the market is obviously tending towards a more favorable price. Due to technicalities I get plucked like a chicken, it seems. In fact I think there is a bias where the person with most foresight about market direction loses the most.
Here are some inexact analogies. What if I used a limit order to sell a house. I decide it should bring in 200k, but in a bind I will take 150k. So am I happy if my agent advertises a "limit sale" for 150k and sells at that? No, that 150 should be a secret showstopper behind the market negotiation. What if I sell a classic car at an auction. I expect about 75k, but set a reserve at 50k. Am I happy if the auctioneer announces my reserve limit, and sells at that instead of striving higher?
Back to the stock trading scenarios. You may sense the market will fall, so set a 1% lower buy limit the night before. As opening time approaches, the futures signal an obvious 3% market drop in the first moments of trading... although you are away at work or whatever. In the open you are thrown to the sharks who sell to you at a 1% discount while microseconds later everyone else settles at the expected 3% discount.
Or you may have to set a limit order higher than the last or current market trades! Your brokerage normally flags you about that, but you may not have the spare cash to cover a surprise unfavorable market trade such as in an IRA. It is no pleasure to then see your limit number appear as an upward spiking trade anomaly. I think I have sometimes gotten better than the limit on a limit order, but too often it is accepted literally.
There are some odd forces that push you towards near zero cash balance in an IRA. Maybe you sell 200 shares of something, and that equates to 97 shares in your desired replacement equity. You really want shares in round numbers or your "all or none" order will tend to not execute. So you set a price which consumes all of your cash to round up to 100 shares. I omit a few dull why-behind-the-whys here.
These problems may be solvable with contingency trading. I guess you can check a limit, then issue a market order. Or if you have to stick to a limit, maybe put a dummy check to avoid opening hour madless (like something to see if the New Zealand market is open yet?) then issue the limit order.
In the case of my off-hours limit getting unexpectedly executed, I think my brokerage failed to let me know I was setting an above off- hour market limit price. They normally keep the off-hour trading in a special web page which I needed to be aware of due to my good-til- cancelled mode. Can't be sure about what happened because they clean out the orders details too fast and I lose time of day info in just the transaction history.
Reply to
dumbstruck
Sharks - hardly! You are thinking of this unilaterally. There is someone on the other side of that trade who is entitled to sell you his shares at your limit price, and doing anything different would be cheating him while rewarding you unnecessarily.
When you place a buy limit order you are signaling to the market that you are perfectly willing to buy 100 shares of XYZ at a price of let's say $10.00. Nobody has forced you to place that order or reveal that information to the market. That becomes part of the order book that is visible to potential buyers. And the existence of that order for security XYZ allows XYZ to open in your scenario at a 3% drop instead of a 3.005% drop or whatever it might be.
Imagine at the open the order book for XYZ looks like this:
Bid 100 @ $10.00 AON GTC - your order 200 @ $9.90 200 @ $9.85 4,000 @$9.70 etc
If I place a market order to sell 1,000 shares of XYZ, my broker has an obligation to obtain best execution. He has an obligation to flush through the higher-priced limit orders still sitting on the book before getting to the $9.70 block.
What you are in effect saying is that you think my broker should improve your order at my expense. But why? His best-execution obligation is to me. You have told everyone publicly that $10 is an acceptable price. You got $10, and now it's sour grapes because you could have gotten better if only you didn't use limit orders.
So what's the solution? Right - don't use limit orders if you don't like the outcome in this scenario. It's always going to be an issue, whether it's an at-the-open incident or some dramatic change that happens mid-day. As long as you use limit orders, you'll lose the opportunity to re-assess your acceptable price immediately before trading, based on any new information that comes out after you place the order.
-Tad
Reply to
Tad Borek
OK, with your kind clarification of definitions, my words did imply that nonsense but not my thoughts or intent. Rising back pain in this typing position may be clouding my articulateness. I hereby withdraw calling limit orders unfair, but will now call them generally undesirable, and no panacea of an alternative to market orders that necessarily are made off hours.
In order to not be crassly arbitraged at opening hour, we need some kind of a compound trade order combining market and limits. Sort of like how stop orders work - their complex definitions had so filled my head that I forgot how limit orders were so starkly defined absent of market sensitive execution. If a limit is reached, stop worrying about the literal limit but convert to a market trade. Crudely possible with "contingent" trades.
Normally you cannot be arbitraged much with market orders because they don't make giant gap moves during hours - or if they do it isn't such a surprise because the trader can examine the volatility history or switch to etfs. But at opening hour, a computer can see you have a queued up order and can accept it at a ridiculous price, then reverse trade it a second later at the more expected price. Maybe I should focus on becoming the beneficiary of such predatory trades, if nobody will believe my alarm... maybe in Asia where they also gap-restart markets after lunch.
There is another context where I am tempted to stop using limit orders. I want to make a buy in IRA using virtually all spare cash. There is a reason for no extra cash being very common which I won't digress on now. The market price is steady all day at 100. My cash won't support x shares at more than 101, so just to avoid a very very unlikely market buy of 101.1... I limit it at 101 and then fume in anger about getting that rather than 100 or even 100.9. I thought it was practically a felony to go negative in your margin-not-allowed IRA, but did this accidentally with no problem and may allow cash to just go negative again in the future (heals at next dividend).
Reply to
dumbstruck
Well, I earlier explained I want a the flip side of what my broker offers in terms of stop loss, stop limit, etc. I said I want stop gain, but now I just found some brokers offer what they call stop-buy or buy-stop-out which I think does the trick.
What a surprise... when this pinched nerve or whatever stops clouding my mind I can take a look at another broker or check deeper in my existing broker for such a functionality. Their "contingent" trades almost can do the trick, but not quite.
Reply to
dumbstruck
Sorry - I take that back. I want the part of stop orders that I think are not implemented. For example a "smart" buy limit order that would often give you a price below the limit (rather than dumb literal limit orders that tend to give you the worst end of the limit). That could be implemented as a stop-market-buy when the price becomes LOWER than now, rather than HIGHER.
I think the current market and limit orders are dumb low tech creatures adapted to old manual ways of filling orders. Then stop orders were added as kind of weird extensions still tied to pre computer limitations. They all made sense in a primitive world, and a live person would be needed during market hours to implement higher level tactics.
But now there are simple and obvious if-then constructs that could easily be set up by Joe Average to spare having to be terminal bound during the business day. I am frustrated by the lack of this ability or the needless flaws in the tools that should enable this. But maybe I should shut up for now because the conceptual principle part of my brain is working better than the detailed explanation side.
Reply to
dumbstruck
Reminds me of some of my customers from before I retired from computer programming. If you can't or won't explain IN DETAIL what you want, your chance of actually receiving it becomes astronomically small.
When people actually explain IN DETAIL what they are asking for, just the process of organizing their thoughts often causes them to realize that they actually NEED something quite different than what they were originally asking for.
Reply to
bo peep
If you want to buy a stock for no more than some price that it less than what it is presently trading for, you could execute a market order. Or, if you are pretty sure it's on its way down, you could use a trailing stop.
Reply to
Ron Rosenfeld
it is presently trading for, you could execute a market order. Or, if you are pretty sure it's on its way down, you could use a trailing stop.
No, that's wrong about the market order (not thinking clearly last night after turkey and fixings and wine). The trailing stop might work in certain circumstances.
Reply to
Ron Rosenfeld

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