Trading Limit orders-- utility of placing better than MID-price numbers in order entry

[srk]

I notice that some traders when they place a limit order for a spread, place it slightly better than the MID price, in the hope of getting a better fill. Does this stratgey really work out getting favorable prices, or is this just a wash , meaning half of these orders get filled and the other half dont ?

I am mainly referring to Index option trades ( SPX, RUT) which are tightly controlled prices with a narrow spread between the bid and the ask, just curious if there are any studies which have looked at this practice, or do you come out about the same, if you place a limit order for a spread AT the MID price offered ?

 

[status1]

It all depends on the market Most of the time if the market is calm you have to pay a little more than the MID to get filled
If the market bounces around a lot you can place it at better than the MID and there is a better chance that you get filled but not because they wanted to fill you at your price it's more likely that the bid/ask prices widened or the mid price came lower that meet or go even lower than your fill price price

When you want to get into a trade you have the luxury to wait since you have nothing to loose so you can place your fill at better than the MID and if you get filled that is good but it's usually because the market is going against you so if you had waited a little longer you could have been filled at even better price

On the other hand if you want to get out of the trade because the market is going against you and want to stop having further losses I would not be placing a trade at better than the MID in hoping to get filled meanwhile the trade is loosing more money the more you wait to get filled

 

[srk]

It all depends on the market Most of the time if the market is calm you have to pay a little more than the MID to get filled
If the market bounces around a lot you can place it at better than the MID and there is a better chance that you get filled but not because they wanted to fill you at your price it's more likely that the bid/ask prices widened or the mid price came lower that meet or go even lower than your fill price price

When you want to get into a trade you have the luxury to wait since you have nothing to loose so you can place your fill at better than the MID and if you get filled that is good but it's usually because the market is going against you so if you had waited a little longer you could have been filled at even better price

On the other hand if you want to get out of the trade because the market is going against you and want to stop having further losses I would not be placing a trade at better than the MID in hoping to get filled meanwhile the trade is loosing more money the more you wait to get filled

thanks

 

[Mark17]

It all depends on the market Most of the time if the market is calm you have to pay a little more than the MID to get filled

I don't really think that's an answer. Yes it depends on the market, but what does the market generally do? To me, that's asking for a large sample size. Do we have that? Do we trust that sample to be from a representative population? If not then we have no answer to this question.

I've tried to keep notes on execution over the years, but it's very difficult because of the unables. These are the trades that don't get filled. I generally try for slightly better than the midprice but sometimes the market runs the other way and I may decide not to chase. I do I categorize that, then? For every positive that I got in setting a limit order better than the mid, what penalty to I pay for not getting a fill when the market continues to run far away? Sometimes, too, I'll see this happening, change my order to GTC, and leave it. Sometimes that gets filled. Other times it does not. How to document it for study? Hard to tell.

Because I don't have well-quantified numbers on this, I'm left with gut feeling. My gut feeling is that it's a wash or slightly worse. Sometimes I've walked away shaking my head thinking "I should just enter a price slightly worse than the mid to make sure I get the fill every time." The fact that this does happen "sometimes" suggests my loss in opportunity cost for those instances was substantial.

 

[status1]

I agree with what you are saying I was just trying to explain that the reason to place it at a better than the mid is not to "HOPE" to get a better fill then the mid because you will not get it The reason is so the market will come to your price and fill it and I am sure by that time the mid will be below your fill price and wished that you would have placed it even better
Sometimes you may get filled at the mid or better depending on the order size and simplicity of the trade but in general you will not

 

[Michael B]

Not looking for an explanation, just saying that these things also happen: often enough I get filled at a better price than my limit order. 5 or 10 cents max.

 

[Mark17]

Not looking for an explanation, just saying that these things also happen: often enough I get filled at a better price than my limit order. 5 or 10 cents max.

I get that occasionally and usually within minutes I'm looking at an unrealized loss.