I don’t understand how everybody else does this, however at any time when I purchase shares of an ETF for my portfolio, I all the time use a restrict order. Nevertheless it’s often a “lazy” restrict order, as a result of I’m simply aiming to purchase instantly at roughly the market value and the restrict order is solely insurance coverage towards a flash crash or comparable anomaly that occurs not often, however nonetheless occurs. So I take a look at the bid/ask costs, and add some wiggle room, and submit a restrict order good till the tip of day.
I’ve learn recommendation elsewhere to put a restrict order on the midpoint between bid and ask, however that makes it so there’s a good probability the order won’t fill that day, and will by no means fill if the market retains shifting. I don’t wish to hold chasing the market value and staring on the order ebook on a buying and selling display. I simply need a truthful fill, and I would like it executed. My holding interval can be a long time, so constantly investing available in the market is a very powerful.
Nonetheless, on newer buying and selling apps like Robinhood, the default possibility is all the time a market order. With smartphone consumer interfaces, all it takes is a fast swipe and off it goes. Typically it takes a little bit searching round to even discover the restrict order possibility.
It seems, Robinhood truly agrees that market orders are harmful. Behind the scenes, Robinhood and plenty of different brokers do one thing referred to as “order collaring” and quietly flip your market order right into a restrict order with a 5% margin. For instance, if the inventory is buying and selling round $100 and you set in a market order (that claims you’ll pay no matter one of the best value is that the second, even whether it is $5,000 or one thing, technically) right into a restrict order for $105 max. Matt Levine wrote Cash Stuff column about order collaring (present article) that factors out that there are buying and selling bots that particularly benefit from these 5% collared orders, particularly on extra thinly-traded shares.
Right here’s how I think about Robinhood’s considering:
“We gotta hold issues easy and enjoyable for these beginner buyers, so we’ll simply allow them to do market orders with a single swipe, no coming into numbers or doing math required! Hmm… however market orders are kinda silly and harmful. So… let’s truly make them a +/- 5% restrict order to allow them to’t actually damage themselves so badly that they’ll get mad at us. If they’re careless sufficient to do a market order, then they received’t discover a 5% dangerous fill however they may discover one thing worse.”
Based on Vanguard, the median bid-ask unfold for his or her widespread Vanguard Whole Inventory Market ETF (VTI) is 0.01%. Meaning roughly 3 cents a share on the present value of ~$270. Right here’s a screenshot from my order display right this moment. The bid is perhaps $268.83 and the ask is perhaps $268.86. Right here, I would simply put in a restrict order at $270 in order that even when the market strikes up a little bit rapidly, I nonetheless get my order crammed. It crammed at $268.93, and some minutes later it was at $269.29.
In the meantime, 5% of $270 is $13.50 per share. That’s rather a lot! 500 occasions the same old unfold, and one thing is often fallacious if it’s that a lot off. I do know that VTI shouldn’t be thinly-traded, and 99.9% of the time, it received’t matter what you set in to your restrict. However occasionally, it’ll matter, and it solely takes an additional few seconds to put a restrict order as an alternative of a market order.
My guess is probably folks suppose that placing in a restrict order will truly encourage the market maker to benefit from them? It’s like when you say “I’ll pay as much as $5 for that Pepsi”, and somebody will cost you precisely $5. It’s higher simply to do a market order and never present your hand or one thing? However this details about order collaring reaffirms that market orders aren’t any higher as a result of they only get became very free restrict orders anyway. The bots will nonetheless see you as a possible sucker. You would possibly as properly set a tighter restrict your self.
