In brief
A market order allows you to instantly buy or sell a financial asset at the best available price. The market order takes the price from the limit order on the order book. This means you cannot know for sure what price you will receive. Slippage occurs when the price you receive is different from the price you expected.
A limit order is different from a market order in that you can place a limit order in advance at a set price. The exchange will only execute orders at the set price or better. You can easily place market orders on Binance in the exchange view. You can find orders by clicking [Markets] in the [Spot] tab.
The main advantages of market orders are their simplicity, speed, efficiency and complete execution in most cases. However, market orders have the disadvantage of the risk of price slippage and the fact that you must be present when executing the order.
Introduce
Trading is much more complex than just a decision to buy or sell. When you buy or sell any financial asset such as cryptocurrency, stocks or forex, you will encounter many different types of orders. From Fill or Kill orders to stop-limit orders, market orders are one of the simplest orders and are often used by beginners. Let us learn the definition of a market order and how it works.
Market order definition
A market order is an order to buy or sell immediately at the best available price. This order needs to be filled with liquidity, meaning the order is executed based on the limit order that is already on the order book. If you want to buy or sell immediately at the current market price, a market order is the best choice for you. For example, the price of BNB might be rising rapidly and you want to buy BNB as soon as possible. You are willing to accept the market price as long as you can buy BNB immediately. In this case, you will place a market order on the selected exchange.
How market orders work
Unlike limit orders that are already on the order book, market orders are executed immediately at the current market price. There are always two sides to a transaction; that is maker and taker. When placing a market order, you are taking the price set by someone else. For example, an exchange will match a buy market order at the lowest ask price on the order book. Conversely, the market sell order will be matched with the highest buy price on the order book.
As mentioned above, market orders require the exchange to have liquidity on the order book to meet immediate trading needs. When a market order takes liquidity away from the exchange, you will have to pay higher fees as the market taker when you place the order. Binance's fee schedule shows a clear difference between maker fees and taker fees.
Market order example
It will be much easier if you observe the relationship between market maker and market taker through numbers. So let's look at the following example. Let's say you want to buy 1 BNB and the current market price is around $370 (US dollars). Go to Binance and open the BNB/BUSD pair. To create a market buy order, enter 1 in the amount field, then click [Buy BNB].
After placing an order, the exchange will view the order book. This ledger contains limit orders with specific quantities and specific prices to buy or sell an asset. In this case, your market order to buy 1 BNB at the market price (also known as the spot price) will be matched with the lowest sell limit order on the order book.
As you can see, the lowest sell limit order on the order book is 1,286 BNB for $371.40 (BUSD). Your market buy order will buy 1 BNB from the 1,286 BNB offered, at a spot price of $371.40.
But let's say you want to buy 500 BNB at the current market price. The cheapest sell limit order available does not have enough quantity to fill your entire buy market order. The remaining quantity of this market order will be automatically matched with the sell limit orders with the next best price, gradually moving up the order book until the order is completely matched. This process is called slippage and is why you pay higher prices and fees (or receive lower prices) when you are a market taker.
Market order versus limit order
In short, a limit order is an order to buy or sell a certain amount of financial asset at a set price or better. You can also choose to have the exchange partially or fully match the limit order. In the second case, if the exchange cannot completely match your order, the exchange will not execute the order.
Market orders can only match existing limit orders. Not everyone wants to take available prices on the market when trading or investing, so limit orders are a suitable alternative. You can use limit orders to plan transactions in advance without having to be present when making the transaction.
Beyond these basic differences, market orders and limit orders are suitable for different trading activities and goals. The limit command is often used more effectively:
1. When the price of an asset fluctuates strongly. Placing a market order in a highly volatile market can yield unexpected results. Prices may change between the time you create an order and the time it is executed. These small differences can be the difference between profit and loss for the arbitrageur. Limit orders ensure you get the price you want.
2. When an asset has low liquidity. In this case, using market orders may lead to price slippage. This happens when there are only a few market makers on the order book and your order cannot be filled easily near the current market price. Then you will get a lower average selling price or a higher average buying price than you thought. On the other hand, a limit order will not be completely filled if slippage causes the price to fall outside your limit.
3. If you already have a strategy. Limit orders do not require you to interact to execute the order and you can place the order in advance. This means your strategy can still work even when you are not actively trading. You cannot do the same thing with a market order.
When should I use market orders?
As we have seen, market orders are effective when you value order execution more than receiving a specific price. This means you should only use market orders if you are willing to pay the higher costs caused by slippage. In other words, market orders are very useful if you are in a hurry.
Sometimes, you may find yourself in a situation where you have a stop-limit order that is crossed and you need to buy/sell as soon as possible. So, if you need to trade immediately or resolve a problem, that's when market orders come in handy.
However, if you are not new to the cryptocurrency market and want to buy some altcoins with Bitcoin, you need to avoid using market orders as you may end up paying more than necessary. In this case, a limit order would probably be better.
When you trade highly liquid assets with low bid-ask spreads, market orders will get you prices close to or equal to the expected spot price. Assets with higher spreads have a much higher potential for slippage.
How to place market orders on Binance
Let's say you want to create a market order to buy 2 BNB. After logging in to your Binance account, go to the exchange view. Select the BNB market you want (e.g. BNB/BUSD), find the [Spot] tab and select [Market]. Then, set the purchase amount to 2 BNB, then click the [Buy BNB] button.
You will then see a confirmation message on the screen and your market order will be executed.
Advantages of using market orders
Depending on the situation, there are four main benefits to using market orders:
1. Market orders are easy to use. If you want to trade highly liquid coins like Bitcoin or ETH with large market capitalization, market orders are quite a safe choice.
2. You can buy or sell as many assets as you want. If you need to close all positions or open one as soon as possible, a market order almost always ensures you can do it.
3. You can trade immediately. You may be under time pressure when making a trade, for example right before closing time. You can be sure that a market order is always the fastest way to do this.
Disadvantages of using market orders
While a market order has its main advantage in execution speed, it has a disadvantage in terms of your control. The main disadvantages of market orders come from:
1. You may experience sharp price slippage with low-volume assets. You could pay more than expected or get much less. If there is not enough quantity on the order book, you will receive a higher or lower price than you expected when placing the order.
2. You cannot plan your trades in advance. You don't always have to sit in front of a screen to trade. If the market goes against your trading strategy while you are sleeping or not ready, you will not be able to place a market order. Otherwise, you can use a limit order or stop limit order to plan ahead.
For more information about limit orders, please read the article: What is a limit order?
For more information on how to use stop limit orders, read the article Stop orders - What is a limit?.
summary
Market orders are the most basic method of buying and selling financial assets. This is the right choice when you want to enter or exit the market immediately. However, the downside is that you will lose the control you have when using other order types. It is best to consider each specific situation and understand when to use market orders or other orders.
