Science: limit orders and market orders

Limit orders and market orders, it is important to understand the difference between the two

Science: limit orders and market orders

limit orders vs market orders
There are two types of orders you can submit on Deribit: limit orders and market orders. It is important to understand the differences between the two, as they can have significantly different results. Each type of order has its advantages and disadvantages, so you may need to use a different order type for different situations.

Limit Orders

A limit order is an order “at a price specified by the trader before placing the order”. If it is not executed immediately, it will remain in the order book at the specified limit price until it is filled or cancelled.

In the case of a sell order, for example, limit orders guarantee a price floor, because the order cannot be executed at a price lower than the specified limit. However, this of course means that they are not guaranteed to be filled.

For example, suppose the current high bid price for Bitcoin is $9,999 and the low ask price is $10,001. If you place a limit order with a “buy limit” of $10,000, then your order will now appear in the order book with a high bid price of $10,000. It cannot be executed at a worse (higher) price, but the order cannot be filled immediately and requires another trader to sell it at $10,000 before it can be filled. If the market suddenly rises and the order book moves up one way from your buy limit, you will miss the rise.

If you don’t want to miss this opportunity, you can use a market order to buy directly. However, using market orders has its own drawbacks.

Market orders

A market order will be executed immediately at the current best quote. If the pending order is not sufficient to fully fill due to that price, then the remaining portion of the order will be transferred to the next best price and the process will be repeated until the entire order is completed. If the order book is not deep enough and at the same time there is a large number of people executing market orders, then the execution price may be worse than expected, a phenomenon called slippage.

Note: There is an exception to this rule if an order enters the order book and the slippage is so large that it triggers the trading bandwidth, which prevents the order from being fully filled

Taker and Maker Orders

There is another way of classifying orders, Taker and Maker, where Taker refers to orders that actively eat into the order book and Maker refers to orders that are pending to the order book, which we generally call providing liquidity. Only limit orders can be maker orders; market price must be taker without triggering the limit bandwidth.

Taker orders will actively go to match Maker orders for execution, thus extracting liquidity. Market orders will always be Taker, but limit orders may also be Taker orders. If the limit price is above the maximum ask price (buy) or below the maximum bid price (sell), it will execute immediately and act as a Taker (unless the order has other advanced settings).

Deribit has a Maker fee-free model for delivery futures and perpetual futures products, and even negative fees for premium accounts. This structure offers lower Maker fees because it rewards orders that provide liquidity (Maker orders) while charging fees for orders that withdraw liquidity (Taker orders).

For example, if Trader A has a $1,000 BTC sell order pending in the order book at $10,000 and then Trader B executes a buy $1,000 market order while Trader A’s order is executed. Trader B is then the Taker and will therefore pay the Taker fee. Trader A is said to be a Maker and will receive a Maker rebate, at least Trader A will not pay a commission.

Placing a Limit Order

Science: limit orders and market orders

Figure 1 Limit Orders

The chart above shows the limit order form for BTC perpetual contracts.

A: Here you can choose whether you want to choose USD or BTC denomination. However, no matter which one you choose, all orders for futures are rounded up to an integral multiple of $10 at the end to place orders in USD.

B. Clicking on this icon will bring up a handy profit and loss calculator.

C. Here you can select the type of order you want to create, Limit is the limit order.

D. Quantity – Enter the size of the position here. For example, if you want to place an order with a position of $20,000, simply enter 20,000, as shown in the figure.

E. Price – Enter the currency you want to place an order for here. The order shown here will be placed at $11,000 for 20,000 orders. You will also notice that directly above the price box, there is a minimum ask price and a maximum bid price, both of which represent the current trading bandwidth.

Note: The bandwidth is set as a percentage of the current marked price on either side. Limit orders can be set outside of these bandwidths, and these trades can be executed only after the marker price changes.

F. Buy and Sell buttons. You will notice that below these buttons are the minimum margin requirements for placing each order.

G. Validity time.

  • GTC – Valid until cancelled. The order will remain pending until it is filled or cancelled.
  • FOK – Fully filled or fully cancelled. This order must be completely filled or it will be cancelled in its entirety.
  • IOC – Fully filled or partially cancelled. This order will be executed immediately, and the part that is not executed will be cancelled. The difference with FOK is that partial fulfillment is acceptable. Thus, if an IOC order of $20,000 is placed at a certain price, but only $7,700 can be filled at that price, $7,700 will be filled and the remaining $12,300 will be cancelled.

H. Other optional settings for Limit Orders.

  • Pending Orders Only – A pending orders only order acts as a Maker order only, i.e., it will not be filled immediately and will be pending in the order book. If the selected limit price will result in an immediate execution, the system automatically adjusts the price to the best price by one Tick. e.g. if the current best sell price is $10,000 and you place a buy limit order with a limit buy price of $11,000, the order will be changed to a pending order for $9,999.50 and will not be executed immediately.
  • Hidden – Hidden orders are not visible to other traders in the order book. However, hidden orders will always pay Taker fees.
  • Decrease Only – A Decrease Only order will only be used to decrease a position. It will never enlarge the position size or open a new position.

I. Your current position size, short position will be shown as a negative number.

J. The maximum leverage currently available for the contract.

Placing a market order

Science: limit orders and market orders

The chart above shows the market order chart for the BTC perpetual contract.

The market order and limit order forms are mostly the same, but there are some specific items that differ, as this order will be executed immediately.

A: Here you have the same choice of position calculation in USD or BTC.

B. Profit and loss calculator.

C. Order type, Market is a market order.

D. Order quantity.

The difference between the Market order form and the Limit order form is that you cannot choose the price of the Market order, as it is executed against the best bid (sell) or best ask (buy).

E. Buy and sell options.

F. Decrease only. Please note that only one Decrease Only option exists here, as the order will be executed immediately, cannot be pending and cannot be used hidden.

G. The size of your current position, which is independent for each contract.

H. The maximum leverage currently available for the contract.

Summary

A limit order can guarantee a better price for a transaction, but not the number of transactions. A market order can guarantee a guaranteed volume, but the price at which it will be filled may be worse.

Which type you choose in a given situation depends on which characteristic you value most, ensuring that the order is filled or ensuring that the price is better.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/science-limit-orders-and-market-orders/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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