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I Always Use Limit Orders
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Today I saw yet another example of someone getting the shaft (and someone giving it) in a market order trade of Ford shares. Yesterday, shares of Ford closed at around $8.15 and this morning, in pre-market action, someone was able to snap up over 800 shares at $7.36, $7.26, and $7.27 – approximately a 10% discount. This is one of the risks of a market order, where you buy or sell shares at whatever the going rate is, even if it’s wildly unreasonable. These sort of worst case scenarios are always described as a perfect storm because you need the convergence of no sellers/buyers (other than the wild bid) and a market order.
If you look at Ford’s Real-Time ECN Order Book for Instinet (or any other stock), you’ll see some pretty out there limit orders (at the time there is a bid for 2250 shares at $7.70 and an ask at $8.44 for 2400 shares) that likely won’t get fulfilled unless something dramatic happens because there are a lot of orders in between. (if you keep an eye out you’ll see crazier things, like 2000 shares at $1)
What happens is you put in your market order, it gets matched to a crazy bid, and you get screwed because you were willing to sell or buy at any price.
Shares of Ford opened at around $8.07 this morning and someone(s) got hosed.
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Great point! Even more critical when buying a new issue on the first day of trading, right after it’s been released to the market