Market Order Execution
A market order is an order to buy or sell a security at its current price in the market. When you place a market order, you can be confident that your shares will be bought or sold, but you do not necessarily know the exact price.
Market Order Scenario 1
You place a market order one night to buy 100 shares of XYZ, and at the time, the price is quoted at $5 per share. However, when your order executes the next morning, you discover you bought 100 shares XYZ for $8 a share. What happened?
Market orders placed outside of regular trading hours are placed for the following regular trading session. Placing market orders outside regular trading hours can be especially risky because a lot can change from market close one day to market open the next. If Company XYZ makes an announcement that they're releasing a much-anticipated new product, for example, their stock price might jump overnight.
A break between prices with no trading in between, like our example of XYZ closing at $5 one day and opening at $8 the next, is called a gap. This can also happen during normal trading hours when something like an earnings announcement immediately impacts stock price. When placing a market order, the potential for a stock to gap up or gap down is an important risk to consider.
Market Order Scenario 2
You place your market order for XYZ at 9:28 a.m. ET to capture the price at market open. However, your trade doesn't execute until 9:32 a.m. ET, and by then, the price is higher than it was at market open. What happened?
Even in the age of electronic trading, information transfer can take a few minutes. A market order placed at 9:28 a.m. ET is placed for the regular trading session (market orders aren't available in pre-market trading). For orders placed prior to market open, you are not guaranteed the opening print, but you are guaranteed participation on the Opening Process if the order is placed prior to that Primary Exchange's cut-off time. If your order is placed just after the cut-off time for a given Primary Exchange, your order will typically fill directly after that Primary Exchanges' Opening Print versus the NBBO (NBBO is the 'national best bid and offer' across all quoting markets).
We route each order to the primary exchange on which that security trades, and each exchange has its own way of calculating the opening price and its own cut-off time to determine which orders participate in the opening process. For example, the NASDAQ cut-off for participation in the opening print is 9:28 a.m. ET, and for NYSE ARCA, it's 9:29 a.m. ET. We continuously route orders to the appropriate primary exchange, and then the handling of the orders is subject to the exchange's unique protocols.
Additionally, it's important to keep in mind that you can't buy stock at a particular price unless there is someone willing to sell it at that price. So, if you place an order at 9:28 a.m. ET, it's very possible that there will be many other orders ahead of yours in line, and by the time yours executes, there might not be any more sellers willing to sell at the market open price.
This issue of 'waiting in line' can occur during the trading day just like at market open. Any time of day you place a market order, it may execute at a different price than the ask price you saw quoted because other investors may have jumped on that price before you did.
Market Order Scenario 3
You place a market order for shares of XYZ, and even though regular trading hours begin at 9:30 a.m. ET, and you see movement in XYZ beginning at 9:30, your order doesn't enter the market until 9:33 a.m. ET. What happened?
Just like in the last scenario, this situation is likely the result of the security's primary exchange being slow to open. We always route orders to the security's primary exchange because our data indicates that primary exchanges are aggregating the most relevant information affecting a security's price as part of a continuous price discovery process and are therefore bringing the most accurate opening prices to market. Many factors influence a security's value, including order imbalances, liquidity (the number of buyers and sellers), company-specific news, industry news, and more.
So, it's possible that you will see a security trading on exchanges other than its primary exchange for a few minutes in the morning if the primary exchange's opening print is delayed.
Market Order Scenario 4
Your order at 9:28 a.m. ET was a NYSE market on open (OPG) order that you placed through your Scottrade broker. You didn't get the opening price, and in fact, your order wasn't even executed at all. What happened?
OPG orders are specifically designed for the opening process at the security's primary exchange. Unlike regular market orders, these orders will be canceled if they are not executed on the opening print. This includes the balance remaining on a partially executed order.
An OPG order must be received prior to 9:25 a.m. ET to be eligible for execution based on the NYSE Arca or NASDAQ official opening price. Each exchange has their own cut-off times for OPG orders, so it's important to be aware of the security's primary exchange and the protocols of that exchange before you place your order.
OPG orders are only available for listed securities and some over-the-counter (OTC) securities. These orders must be entered by a Scottrade broker, as these order types cannot be entered online. Although these order types are broker-assisted, the online commission rate will still apply.
Market Order Scenario 5
You place a market order for a stock with a low average daily volume, and you are anticipating buying it at or near the last trade price, which was $13 per share. When the order executes, you discover you paid $15 per share. What happened?
Particularly when a stock has low trading volume, the bid and ask prices can be significantly different than the last price at which it was traded.
Buy market orders are generally executed at the ask price. This is the lowest price that sellers will accept for their shares. Sell market orders are generally executed at the bid price. This is the highest price buyers are willing to pay for the shares. When you are placing a market order, look to the bid and ask prices rather than the last trade for a more accurate idea of the current value. But remember, even the bid and ask might not be the prices you actually get when your market order executes.
Additionally, bid and ask prices can represent only a small number of shares, and the next price level could be significantly higher or lower than the bid/ask being displayed. This is because low trading volume signals a thin or shallow market, where the number of buyers and sellers is low compared to more liquid securities. To determine how deep the market is on a particular security, you can use advanced quoting tools such as TotalView or Level II. Level II is available in Scottrader Streaming Quotes and ScottradeELITE, and TotalView is only available in ScottradeELITE.