Résumé
A Market order allows you to instantly buy or sell a financial asset at the best price currently available. Market orders take prices from Limit orders in the order book. This means that you cannot be 100% sure of the price you will get. Slippage may occur and you will get a different price than you expected.
Limit orders differ from Market orders in that you can place them in advance with a set price. The exchange will only process your order at the set price or better. You can easily place Market orders on Binance in the exchange view. You can find them by clicking [Market] under the [Spot] tab.
The main advantages of Market orders are their simplicity, immediate execution, efficiency and ability to execute completely most of the time. However, Market orders are not advantageous due to the risk of slippage and the fact that you must be present when the order is executed.
Introduction
Trading is more complex than simply deciding whether to buy or sell. When you buy or sell financial assets such as cryptocurrencies, stocks or Forex, you will come across different order types. From Fill or Kill orders to Stop-limit, Market orders are one of the simplest and are often used by beginners. Let's see what Market orders are and how they work.
Market order definition
A Market order is an order to buy or sell at the best price currently available. It needs liquidity to be filled, i.e. it is executed based on Limit orders already placed in the order book. If you want to buy or sell instantly at the current market price, it is best to set a Market order. For example, the price of BNB can rise quickly and you want to buy it as quickly as possible. You are willing to accept the market price as long as you can buy BNB instantly. In this case, you place a Market order on the exchange of your choice.
How a Market order works
Unlike Limit orders placed in the order book, Market orders are executed instantly at the current market price. There are always two counterparties in a transaction: the maker and the taker. When you place a Market order, you take the price set by someone else. For example, an exchange will match a Market buy order to the lowest ask price in the order book. On the other hand, a Market order to sell will be associated with the highest bid price in the order book.
As mentioned, Market orders require an exchange, these in fact have the necessary liquidity on the order book in order to meet instantaneous demand. Since a Market order removes liquidity from the exchange, you pay higher fees as a taker when you place one. The Binance fee schedule clearly shows the difference between maker and taker fees.
Example of a Market order
It's much simpler to see the relationship between a maker and a taker with numbers, so let's look at an example. Let's say you want to buy 1 BNB, and the current market price is around $370 (US dollars). You go to Binance and open the BNB/BUSD pair. To create your purchase order, you must enter 1 in the Amount field and click [Buy BNB].
After placing your order, the exchange reviews the order book. This ledger contains Limit orders with a specific quantity and a specified price to buy or sell an asset. In this case, your order to buy 1 BNB at the market price (also called spot price) will be associated with the lowest Sell Limit order in the order book.
As you can see, the lowest Sell Limit order in the book is for 1.286 BNB at $371.40 (BUSD). Your Market buy order will purchase 1 BNB from the 1,286 BNB on offer, giving you a spot price of $371.40.
Now let's say you want to buy 500 BNB at the current market price. The cheapest Sell Limit order does not have the volume to fill your entire buy order in the market. The remaining volume of your market price order will be automatically matched with the next best Sell Limit orders, moving up the order book until it is completely filled. This process is called slippage, which is why you pay a higher price and fees (or receive a lower price) as a taker.
Order Market or Order Limit
To briefly recap, Limit orders are orders to buy or sell a quantity of financial assets at a set price or higher. You can also choose whether the exchange can partially fill your Limit order or whether it must be fully filled. In the latter case, if the exchange cannot completely fill your order, it will not execute it at all.
Market orders can only be processed with existing Limit orders. Not everyone wants to take the price available in the market when it comes to trading or investing, which is why a Limit order is a great alternative. You can use Limit orders to plan your trades in advance without needing to be at your desk to trade.
In addition to these basic differences, Market orders and Limit orders are suited to different trading activities and objectives. Limit orders are generally suitable:
1. When the price of an asset is very volatile. Placing a Market order in a highly volatile market may generate unexpected results. The price may change between the time you create the order and the time it is executed. For arbitrage traders, this can be a win or a loss. A Limit order will allow you to get the price you want or better.
2. When an asset has low liquidity. In this case, using a Market order may cause slippage. This happens when there is low maker volume in the order book, and your order cannot be easily executed around the current market price. You will then end up with a lower average selling price or a higher average buying price than you had imagined. A Limit order, on the other hand, will not be fully executed if slippage takes the price out of your limit.
3. If you already have a strategy. Limit orders require no interaction on your part to fill, and can be placed in advance. This means that your strategies can still be executed, even if you are not actively trading. You cannot do the same thing with market orders.
When to use a Market order?
As we've seen, Market orders are useful when executing your order is more important than getting a specific price. This means that you should only use Market orders if you are willing to pay a higher cost caused by slippage. In other words, Market orders are useful if you are in a hurry.
Sometimes you may find yourself in a situation where you had a Stop-limit order that was exceeded, and you need to buy/sell as soon as possible. So, if you need to enter a trade immediately or get out of a bad situation, that's where Market Orders come in handy.
However, if you are not a cryptocurrency newbie and want to buy altcoins with your bitcoins, avoid using a Market order as you may end up paying more than you need to. In this case, a Limit order is probably preferable.
When trading highly liquid assets with a narrow bid-ask spread, a Market order will allow you to get a price close to or equal to the expected spot price. Assets with a wider spread are much more likely to cause slippage.
How to place a Market order on Binance?
Let's say you want to create a Market order to buy 2 BNB. After logging into your Binance account, go to the Exchange view. Choose the BNB market of your choice (e.g. BNB/BUSD), find the [Spot] tab and select [Market]. Next, set the purchase amount to 2 BNB and click the [Buy BNB] button.
You will then see a confirmation message on the screen, your Market order will then be executed.
Advantages of using a Market Order
Depending on the situation, using a Market order has three main advantages:
1. Market orders are easy to use. If you are looking to trade a highly liquid currency like Bitcoin or ETH with a large market capitalization, a Market order is a fairly safe option to use.
2. You can buy or sell as much of an asset as you want. If you need to close all your positions or open one as soon as possible, a Market order can almost always guarantee that you will be able to do so.
3. You can trade immediately. You may have time to execute a trade, for example just before a market closes. You can be sure that your Market order will almost always be the fastest way to do this and at least as fast as a Limit order.
Disadvantages of using a Market order
Although the strength of a Market order lies primarily in its speed, it is penalized by the control you exert over it. Its main disadvantages come from the fact that:
1. You may experience high slippage with low volume assets. You risk paying more than expected or receiving much less. Without sufficient volume in the order book, you will move up or down depending on the orders placed.
2. You cannot plan your trades in advance. You also can't always be in front of your screen, ready to trade. If the market moves against your trading strategy while you sleep or if you are unavailable, you will not be able to place a market order. Alternatively, you can use a limit order or a stop-limit order to plan your actions.
For more information on limit orders, please see: What is a limit order?
For more information on using Stop-limit orders, see What is a Stop-limit order?.
To conclude
A Market order is the most basic method of buying and selling financial assets. It is the best option for immediately entering or exiting a market. However, its disadvantage is the lower level of control than other order types. Your best option is to consider the specific situation you find yourself in and understand when it is best to use one Market order or another.
