Poke for Bargains: Improving Stock Entry Prices with Limit Orders
Summary
The document explains a limit order tactic for investors who want to buy a stock at a better price than the current ask. It first distinguishes investors, who take liquidity with marketable orders, from market makers, who post bids and offers to earn the spread. It suggests that market makers may quote prices beyond the levels at which they are willing to trade, hoping impatient participants will accept those quotes.
A buyer can post a bid just below the ask and wait for a market maker to fill it, or raise a bid in small increments until a fill occurs. The example describes a market with a $1.00 bid and a $1.10 ask, with potential savings if the buyer gets filled below the ask. The document gives an illustrative execution rationale, not empirical performance evidence. It does not address queue priority, adverse selection, fees, partial fills, or the risk that the market moves away before execution; its claim that the worst case matches a market order depends on the simplified example.
Key ideas
- Market orders can execute immediately but generally pay the ask when buying or receive the bid when selling.
- Market makers post limit orders and seek to earn the bid-ask spread for supplying liquidity.
- A buyer can post below the ask and wait for a market maker to trade against the order.
- Incrementally raising a bid may improve the entry price if a fill occurs before the ask is reached.
- The example does not account for queue priority, adverse selection, fees, or missed executions.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.