A market order is used to immediately buy or sell an asset at the current market price. Market orders pay “taker” trading fees, as they are taking liquidity from the order book. In other words, they take away from the number of resting orders present in an exchange’s order book, since market orders may be filled from resting limit orders.
When Should You Use a Market Order?
A trader should use a market order when they wish to fill and execute an order immediately and do not care about the specific price at which it gets filled.
In this way, a market order allows the trader the certainty of getting in or out of the market and getting filled. That applies to situations where the execution and/or speed of completing the trade is more important than the price at which the order is filled.
This can be especially useful during a fast-moving market when the trader wishes to quickly get in or out of a position – a limit order would be too slow to allow that – or if the price moves too quickly away from the order otherwise.
A market order may also be useful if a trader wants to trade the market actively at the current price or to execute the order immediately as close to the current market price as possible.
What are the Advantages and Disadvantages?
The advantage of a market order is that the trade is executed and filled immediately without having to wait for the price to meet a specified level like for a limit order.
The disadvantage, however, is that the trader may end up paying a higher price, especially in a fast-moving market where liquidity tightens from the order book – thus leaving fewer orders with which to fill the trader’s order.
Typically, a market maker may fill a market order at or above the ask price for a buy market order, and at or even below the bid price for a sell market order.
For traders who are trading a large size, they may face slippage in prices if trading market orders. That means their orders may be executed at a range of prices due to the availability of inventory at a certain price. Meanwhile, with limit orders, the trader can more easily specify and control which price they would be willing to accept for the trade to be executed and filled.
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