Limit orders and bid/ask spread | Forex Factory

Options

Permalinks
Print Thread

Similar Threads

MT4 Bid orders instead of Ask 0 replies

I am looking for a bid ask spread histogram indi mt4 1 reply

JForex: BID/ASK value(s) for all market orders on the chart 12 replies

Should I use bid/offer orders (spread free) over limit orders? 4 replies

Looking for bid/ask Spread Indicator 0 replies

Limit orders and bid/ask spread

  • #1
  • First Post: Jan 5, 2011 3:26pm Jan 5, 2011 3:26pm
Hi all, need someone that can clarify this point...

Is it true that using limit orders the bid/ask spread is not paid?

If this is true, does it apply even for market maker brokers?


Thanks in advance.
  • #2
  • Jan 5, 2011 3:56pm Jan 5, 2011 3:56pm
In true markets it is the case that if you place limit orders - and essentially make the market - the bid/ask spread is not paid. This is not the case for retail forex brokers in general though.

So to answer your questions: respectively yes and no.
The nail that sticks out gets hammered back in
  • #3
  • Jan 5, 2011 4:00pm Jan 5, 2011 4:00pm
So, if I trade futures or stocks and enter in with a limit order I don't pay the spread.

In forex we can say that this apply only for ECNs and not for market makers?
  • #4
  • Jan 5, 2011 4:06pm Jan 5, 2011 4:06pm
The answer about bid/offer orders might be what you're looking for

http://www.dukascopy.com/swiss/english/forex/faq/#58
  • #5
  • Jan 5, 2011 4:22pm Jan 5, 2011 4:22pm
Quoting Eclipse
Hi all, need someone that can clarify this point...

Is it true that using limit orders the bid/ask spread is not paid?

If this is true, does it apply even for market maker brokers?


Thanks in advance.
In forex no...You will have to pay the spread...Your limit order will only get executed when the ask price you see on your screen matches it if you are buying and vice versa when you are selling...

In other markets, this is not always the case...


Regards,

Nader
  • #6
  • Jan 5, 2011 4:33pm Jan 5, 2011 4:33pm
Quoting burn
The answer about bid/offer orders might be what you're looking for

http://www.dukascopy.com/swiss/english/forex/faq/#58

This reinforce my doubts.

About this kind of order Dukascopy says: "The order placed is the only one able to capture potential market orders sent by other internal participants to the marketplace"

I'm sorry, but why should I need your homemade order to do this? Can't I do it with a simple limit order?

When I use a LMT I decide where my own bid and ask must be set and I become a liquidity supplier, thus I can be filled by anyone that wants to enter in with a market order in the opposite direction.
So, he pays the spread for taking out liquidity and I don't. (at this point I would even ask why I don't GAIN it).

Got confused....
  • #7
  • Jan 5, 2011 4:40pm Jan 5, 2011 4:40pm
Quoting narafa
In forex no...You will have to pay the spread...Your limit order will only get executed when the ask price you see on your screen matches it if you are buying and vice versa when you are selling...

In other markets, this is not always the case...


Regards,

Nader
Ok, but why in forex (are you referring to market makers, ECNs or both?) no and in other markets (please define "this is not always the case") yes?
  • #8
  • Jan 6, 2011 3:25am Jan 6, 2011 3:25am
Quoting Eclipse
Ok, but why in forex (are you referring to market makers, ECNs or both?) no and in other markets (please define "this is not always the case") yes?
Yes sure I am referring to market makers...ECNs are different because there are volumes for each bid and offer in ECNs, so if you bid enough volume with a limit order, you can get filled without paying the spread, in other words, you are becoming part of the price makers on the ECN in that case...

In the case of market makers they are willing to take the other side of the trade no matter how large your position is...Of course there will be restrictions with some market makers with the matter of volume because they do have a limit....But they are always taking the other side of the trade, so your bid is always their ask and vice versa...

Let me clear this a little bit...Most market makers offer leverage between 50:1 and 400:1...Let's be reasonable and say that you are trading with a market maker offering 100:1....A retail forex trader opening an account with $5,000 or $10,000 is not an issue for the market maker...After all, the maximum he/she can trade will be 10 standard lots or $1 million and this consumes all the required margin after all....

However, what happens if the retail forex trader deposits $1 million into his/her account??? This means that theoretically he/she can use leverage and open positions up to $100 millions...Not a chance for the market maker...In such cases, the market maker will refuse the client in the first place or will restrict his/her trading....

For other markets, it differs from one to another...For example, some markets do not have market makers in the first place...These markets are called order driven markets...In such markets, your limit is always skipping the spread, however, the spread in those markets don't go to someone specific...

Other markets having market makers quoting bids and offers all the time (called quote driven markets) differ in their rules...Some markets require market makers to honor the limit orders of clients like you and place them on the system even if they are between their spread (Thus preventing them from making the spread temporarily)....Other markets give some advantages to market makers and permit them to give their own orders some priority over clients orders for a specific amount of time, but they have to honor the clients orders after that...


Regards,

Nader
  • #9
  • Jan 6, 2011 6:38am Jan 6, 2011 6:38am
Quoting narafa
ECNs are different because there are volumes for each bid and offer in ECNs, so if you bid enough volume with a limit order, you can get filled without paying the spread, in other words, you are becoming part of the price makers on the ECN in that case...
Why can I avoid paying the spread only if I bid enough volume?


Quoting narafa
For other markets, it differs from one to another...For example, some markets do not have market makers in the first place...These markets are called order driven markets...In such markets, your limit is always skipping the spread, however, the spread in those markets don't go to someone specific...
So, in a quote-driven market (e.g. NYSE) I pay the spread, while in order-driven market (e.g. Globex) I don't. Is it correct?

If yes I keep not understanding why this happens.
Is it because of the electronic match of the orders without the middleman?

Thanks for your time..
  • #10
  • Jan 6, 2011 9:11am Jan 6, 2011 9:11am
Quoting Eclipse
Why can I avoid paying the spread only if I bid enough volume?
An ECN is actually collection of prices from different trading venues...For an OTC market like FX, that's equivalent to feeding different market makers quotes (bids and offers) to 1 place....

When you post a limit bid for example on an ECN, you are providing liquidity to the ECN just like any other market maker, however, you are only providing 1 side of the market and thus there is a small imbalance you just created...Small imbalances are never looked at, so chances that someone watching the market will hit your bid are minimal (And practically speaking you will have to wait until the offer side hits you for a match and eventually end up paying the spread also), however it still can happen that someone will hit your bid with a market order and then you skip the spread...

When your bid on the ECN is of considerable volume, you will probably find a participant willing to take that volume with a market order...


Quoting Eclipse
So, in a quote-driven market (e.g. NYSE) I pay the spread, while in order-driven market (e.g. Globex) I don't. Is it correct?
NYSE is not a quote driven market...Nasdaq is....Globex is not an order driven market, Globex is a quote driven market with market makers quoting continuous bids and offers for future contracts as well as future options...However, there is a lot of protection from CME for market makers operating on Globex....

And to answer you question, no it depends...Sometimes you won't pay the spread in a quote driven market, some other times you will pay the spread in an order driven market....It all depends on available liquidity...

I bet you are more confused now


Regards,

Nader

If yes I keep not understanding why this happens.
Is it because of the electronic match of the orders without the middleman?

Thanks for your time..[/quote]
  • #11
  • Jan 6, 2011 10:14am Jan 6, 2011 10:14am
Quoting narafa
When you post a limit bid for example on an ECN, you are providing liquidity to the ECN just like any other market maker, however, you are only providing 1 side of the market and thus there is a small imbalance you just created...Small imbalances are never looked at, so chances that someone watching the market will hit your bid are minimal (And practically speaking you will have to wait until the offer side hits you for a match and eventually end up paying the spread also), however it still can happen that someone will hit your bid with a market...
OK, but if price exceeds my limit order and literaly breaks through it I am dead sure my order will be executed, even if my position size is small, because we will reach a point where my bid/offer is the most competitive one. For example:

I set a 1 lot buy limit order on EUR/USD @ 1.3121.
Price goes down and breaks through 1.3121, reaching 1.3119.
It's impossible not to get filled. Isn't it?
The point is will I get filled at the bid or at the ask?

Or do you mean that for my 1 lot buy limit @ 1.3121 there must be another exact 1 lot sell market order @ 1.3121 because if there is a 3 lot sell MKT @ 1.3121 I risk not to get filled as of lack of liquidity?


Quoting narafa
And to answer you question, no it depends...Sometimes you won't pay the spread in a quote driven market, some other times you will pay the spread in an order driven market....It all depends on available liquidity...
  • #12
  • Jan 6, 2011 2:18pm Jan 6, 2011 2:18pm
Quoting Eclipse
OK, but if price exceeds my limit order and literaly breaks through it I am dead sure my order will be executed, even if my position size is small, because we will reach a point where my bid/offer is the most competitive one. For example:

I set a 1 lot buy limit order on EUR/USD @ 1.3121.
Price goes down and breaks through 1.3121, reaching 1.3119.
It's impossible not to get filled. Isn't it?
The point is will I get filled at the bid or at the ask?

Or do you mean that for my 1 lot buy limit @ 1.3121 there must be another exact 1 lot sell market...

You are right, in order to avoid paying the spread in your case, there must be a 1 lot sell market order hitting your limit bid....Market orders do not have a specific price...So, it's no correct to say a sell market order @ a certain price...If there is a 3 lot sell market order coming, you will get filled along with some lower bids below you until the seller get filled on the other 2 lots...

To remove the confusion, you need to read a little bit about market and limit orders to get a grasp of the concept and differences between them, if you already don't know the difference.


Regards,

Nader
  • #13
  • Jan 6, 2011 3:37pm Jan 6, 2011 3:37pm
Quoting narafa

NYSE is not a quote driven market...Nasdaq is....Globex is not an order driven market, Globex is a quote driven market with market makers quoting continuous bids and offers for future contracts as well as future options...However, there is a lot of protection from CME for market makers operating on Globex....
[/quote]

Hey,

little off topic, how does globex and eurex compare? I've been watching some people scalp on tick charts on eurex with bid/ask orders very successfully. It was 40% lifted, 60% price run over.
  • #14
  • Jan 6, 2011 4:36pm Jan 6, 2011 4:36pm
Quoting narafa
You are right, in order to avoid paying the spread in your case, there must be a 1 lot sell market order hitting your limit bid....Market orders do not have a specific price...So, it's no correct to say a sell market order @ a certain price...If there is a 3 lot sell market order coming, you will get filled along with some lower bids below you until the seller get filled on the other 2 lots...
So the problem doesn't exist as what you have just described is simply how markets behave. I can't see nothing particular in it. Am I missing something?

The points I need to clarify are the statements below: where is the bullshit?

In an ECN environment I can act as a market maker by providing liquidity using limit orders waiting to get executed by urgents buyer/seller who use market orders (and for this pay the spread).

If the price breaks thru my limit order I am sure to get executed.

When I set a buy LMT I get executed at the bid price, while with a sell LMT I get executed at the ask price.

So, per roundtrip, if I enter with a buy LMT and exit with a sell MKT I do not pay the bid/ask spread.

If I want to act 100% like market makers do I the enter with a LMT and exit with another LMT, thus earning the bid/ask spread.
  • #15
  • Jan 6, 2011 4:56pm Jan 6, 2011 4:56pm
Quoting Eclipse
So the problem doesn't exist as what you have just described is simply how markets behave. I can't see nothing particular in it. Am I missing something?

The points I need to clarify are the statements below: where is the bullshit?

In an ECN environment I can act as a market maker by providing liquidity using limit orders waiting to get executed by urgents buyer/seller who use market orders (and for this pay the spread).

If the price breaks thru my limit order I am sure to get executed.

When I set a buy LMT I get executed at the bid price, while...

That's true...


Regards,

Nader
  • #16
  • Jan 6, 2011 5:01pm Jan 6, 2011 5:01pm
Hey,

little off topic, how does globex and eurex compare? I've been watching some people scalp on tick charts on eurex with bid/ask orders very successfully. It was 40% lifted, 60% price run over.[/quote]

Agreed that it went a little off-topic...Globex and Eurex are the both quote driven markets...


Regards,

Nader
  • #17
  • Last Post: Feb 23, 2011 1:14am Feb 23, 2011 1:14am
Do any of you know a forex broker that somehow provides the trader if the orders are coming in on the bid or the ask?

Stated differently, is there a way to see if forex market makers are hitting bids or lifting the offers? The way you can with stocks on level II.

Any clarity or recommendations are well received!

Thanks,

~ Pomtrade
0 traders viewing now