The market order is a type of order that the investor launches to attack the market on the buy side (long position) or on the sell side (short position) to guarantee its execution by all the securities or contracts you want to buy or sell.
This order, therefore, guarantees the execution of the securities but not an exact execution price, since the supply and demand of prices is reflected in electronic annotations that move in microseconds and, therefore, since the investor launches the order until executed price may vary. Generally, this order is considered more aggressive than the other types of orders ( stop loss and limit order ).
It is important to note that the orders are entered electronically in a single book of orders by value based on time criteria in the introduction of the orders, having preference the orders entered before and ordered by price. In turn, in these annotations the ownership of each order cannot be seen, and they are made through the market members who have a license to operate in it, generally through brokers or securities agencies or banks, by entering the orders by telephone or through the investment platform provided by this market member.
Market order examples
Let’s look at the following examples of market executions:
- We assume an investor who wants to buy 1,000 shares of X company whose equilibrium price that equals market demand to supply is 5 euros. Let’s look at the following table:
In this example, we have launched a buy market order and in the sale the order has been crossed in two different tranches, one of 500 titles at 5 euros and the other of 500 titles at 5 euros .
Tip: Let’s imagine that our broker charges us a commission per operation of 5 euros. In this example, instead of charging us 5 euros as was our original calculation since we only launched one order, it crosses us in two sections, generating two orders and, therefore, it would charge us 10 euros. Although it is true that, we could claim the excess commission from our broker since in the end, it has been crossed at the same price. In good faith as goodwill, you could return 5 euros for the execution as if it were just a transaction.
If they will be crossed at different prices, for example 500 titles at 5 euros and another 500 titles at 4 euros, the broker would not have the obligation to return any commission since the market itself sets the prices.
On the other hand, to the expenses of this operation, which can be a fixed commission or a variable commission based on the trading cash (defined as the multiplication of the number of securities by market price at each crossing), we would have to add the expenses of the fees of the stock market, brokerages, commission of custody of the securities, portfolio transfers, futures in case we may be interested and spread (suppose that the purchase price is 5.00 euros but the sale price is 5.02 euros, there is a difference of 0.02 euros that represents a cost for the investor and affects their profit and loss account).
2. Let’s imagine the same previous case but in a more liquid security and we observe that the price at that moment is at 5.01, but when we enter the order we find a better price in the market (the opposite could be the case).
In this case, the execution has been correct and the price at which we have bought (5 euros) has been better than the one we wanted to buy, this is at 5.01 euros, and it has only been crossed at a single price, applying only a commission.
3. In this case, the example is the same but assuming that the value is not very liquid.
In this case, we wanted to buy 1,000 shares of this value and in the purchase panel the equilibrium price was 5 euros, but in the sale the order matches and sweeps different prices, therefore, as many operations are generated as there are crosses, specifically , 4 commissions for each of the crosses.
As a consequence, the cost of the operation becomes much higher. There are many cases in which if we operate in little-traded securities, we can find many more executions than we expected, generating a much higher cost.
The routing of the orders and their control is vital for investors, brokers must constantly monitor it, since it may be the case that an order has been executed in the market but the client has not painted the order and does not see the execution. In this case, the client can get nervous and may think that the same has not been executed trying to launch more orders, and therefore, duplicating the initial order. It is the task and responsibility of the member market team BackOffice is perfectly qualified to solve these problems through its error log and can identify immediately if the order is executed or not, and thus, can be written to the client.