Matt Levine explains why you should always use a limit order: Since this isn't cryptocurrency, the brokerage stepped in, but they lost money: But the thing I wonder is: why even have market orders...
Matt Levine explains why you should always use a limit order:
There are two ways to buy stock: market orders and limit orders. A limit order says: “I would like to buy 100 shares of Amalgamated Widgets at $20 or less.” If the stock is available at $20 or less, you get your shares. If it’s not, you don’t. You don’t know for sure if your order will be executed, but you do know the maximum price. A market order says: “I would like to buy 100 shares of Amalgamated Widgets at whatever price I can get.” You know the order will be executed, but you don’t know at what price.
Market orders are famously risky, because occasionally prices surprise you. So 99.99% of the time, what happens is that you see Amalgamated Widgets stock trading at $20 per share, and you say “I would like some of that,” and you put in an order to buy 100 shares of Amalgamated Widgets at whatever the market price is, and by the time you press the button on your order and it runs through your broker’s systems and gets to the trading venue and gets filled, the price is, like, $20.01, or $20.02, or $19.98 or whatever, and you get your shares at a slightly different price from the one that you saw on the screen, and you say “ah that’s fine” or “oh well, slippage,” and you understand that pressing the buttons on your retail brokerage’s website is not an exact science but it’s good enough.
And then 0.01% of the time, what happens is that you see Berkshire Hathaway Inc. Class A shares trading at $185 per share, and you say “I would like some of that,” and you put in an order to buy 100 shares of BRK/A at whatever the market price is, and by the time the order gets filled, uh, 90 minutes later, the price is $741,971.39 per share, and you get a bill for $74 million instead of the $18,500 you expected:
On the morning of Monday, June 3, 2024, at approximately 9:50 am EDT, the price of Berkshire Hathaway Class A shares (“BRK A”) suddenly plummeted in the space of a few seconds from approximately $622,000 per share to approximately $185 per share. This occurred as part of an unspecified technical issue at the New York Stock Exchange (“NYSE”). This technical issue and dramatic price event led NYSE to promptly halt BRK A from trading.
News of BRK A’s anomalous price drop quickly spread across social media. Some of the clients of the various brokerage subsidiaries of Interactive Brokers Group, Inc. (together with its subsidiaries, the “Company”), in an apparent attempt to take advantage of this “opportunity,” submitted market buy orders during the trading halt, presumably expecting those orders to be filled at approximately $185/share when trading resumed.
Without any further notice and without addressing a substantial order imbalance that developed during the halt, NYSE resumed trading of BRK A at approximately 11:35:54 am EDT at a price of $648,000. Over the next 98 seconds, the price of BRK A rose to as high as $741,971.39 per share. Many of the Company’s clients that had placed market buy orders during the trading halt were filled at various prices during this run-up, including some who were filled at the peak price.
Since this isn't cryptocurrency, the brokerage stepped in, but they lost money:
If you did this dumb trade, Interactive Brokers fixed it for you: They took over the trades and ended up buying a lot of BRK/A stock for roughly $48 million more than it was worth.[3] Interactive Brokers also “filed a clearly erroneous execution (‘CEE’) petition with NYSE and certain other U.S. exchanges, seeking to bust the trades that had occurred at anomalously high prices during the disorderly market that followed the resumption of trading.”
But the exchanges declined to bust the trades, apparently on the reasoning that those trades were not clearly erroneous. Paying $648,000, or even $741,971.39, for BRK/A shares is not crazy. Paying $185 is. The customers tried to buy the stock at clearly erroneous prices, but they ended up buying it at regular prices. Erroneously. They made the error, not the market.
But the thing I wonder is: why even have market orders in the UI of a retail brokerage? If you want to buy shares, why not always ask what's the most you're willing to pay? They could even autofill it for you. Is it just tradition?
I suppose it normally works out, except when things are very weird, but that's when you need one.
Market orders are still what consumers expect, and most stocks aren't as volatile in raw price as Berkshire. If you market order VOO, you'll be fine. When you do limit orders by default, you get...
Market orders are still what consumers expect, and most stocks aren't as volatile in raw price as Berkshire. If you market order VOO, you'll be fine. When you do limit orders by default, you get experiences like the stock floats 5 cents above your limit and now you have to cancel and redo it.
If it's during trading hours, it seems like it could be a dialog box where it bumps it up a bit. "Buy failed due to price increase. Try again at <new price>?"
If it's during trading hours, it seems like it could be a dialog box where it bumps it up a bit. "Buy failed due to price increase. Try again at <new price>?"
This may be a thing on some exchanges, but they should allow you to do a range of prices, like between .5% in either direction, just to deal with the issue you're talking about.
This may be a thing on some exchanges, but they should allow you to do a range of prices, like between .5% in either direction, just to deal with the issue you're talking about.
I learned my lesson on market orders the hard way. Paid a full 6% higher on a buy than intended, then sold for a full 3% lower than I intended. Market orders for me from now on.
I learned my lesson on market orders the hard way. Paid a full 6% higher on a buy than intended, then sold for a full 3% lower than I intended. Market orders for me from now on.
Matt Levine explains why you should always use a limit order:
Since this isn't cryptocurrency, the brokerage stepped in, but they lost money:
But the thing I wonder is: why even have market orders in the UI of a retail brokerage? If you want to buy shares, why not always ask what's the most you're willing to pay? They could even autofill it for you. Is it just tradition?
I suppose it normally works out, except when things are very weird, but that's when you need one.
Market orders are still what consumers expect, and most stocks aren't as volatile in raw price as Berkshire. If you market order VOO, you'll be fine. When you do limit orders by default, you get experiences like the stock floats 5 cents above your limit and now you have to cancel and redo it.
If it's during trading hours, it seems like it could be a dialog box where it bumps it up a bit. "Buy failed due to price increase. Try again at <new price>?"
This may be a thing on some exchanges, but they should allow you to do a range of prices, like between .5% in either direction, just to deal with the issue you're talking about.
Usually going a few cents above the mid price will get your order filled eventually. Even a few below will often get it filled the same day.
I learned my lesson on market orders the hard way. Paid a full 6% higher on a buy than intended, then sold for a full 3% lower than I intended. Market orders for me from now on.
Mirror: https://archive.is/UqN0q