Summary
Market orders buy or sell financial assets instantly at the current best price. Market orders "eat up" limit orders in the order book. This means that you can't be 100% sure you'll get the price you want. When the transaction price doesn't match the expected price, slippage occurs.
Limit orders differ from market orders in that you can set a price in advance. The exchange will only execute your order if the set price or a better price is reached. You can easily place a market order on Binance's trading view. You can find it by clicking [Market] under the [Spot] tab.
The main advantage of market orders is that they can be executed simply, directly, and efficiently in most cases. However, market orders also have disadvantages: there is a risk of slippage and the order needs to be watched when executing.
Introduction
Trading is more complex than just buying and selling decisions. When buying and selling financial assets such as cryptocurrencies, stocks or forex, you will encounter various types of orders. From all-or-kill orders to stop-limit orders, market orders are the simplest of them all and the most common order for beginners. Let's take a look at what market orders are and how they work.
Definition of Market Order
Market orders are orders to buy or sell immediately at the current best price, and require liquidity to be filled. This means that such orders are executed against limit orders posted in the order book. Placing a market order is the best option if you want to buy or sell immediately at the current market price. For example, the price of BNB may rise quickly, and you want to buy it as soon as possible. You are willing to pay the market price as long as you can buy BNB immediately. In this case, it is best to execute a market order in your chosen trading platform.
How Market Orders Work
Unlike limit orders in the order book, market orders are executed immediately at the current market price. There are usually two parties to a trade: the "maker" and the "taker". Placing a market order means that you will be traded at the price set by someone else. For example, the exchange will buy a market order at the lowest ask price in the order book. Conversely, the exchange will sell a market order at the highest bid price in the order book.
As mentioned above, market orders require the trading platform's liquidity in the order book to meet immediate demand. Because market orders "take" liquidity from the trading platform, you need to pay a higher fee as a market taker when you place a market order. Binance’s fee schedule illustrates the significant difference between maker and taker fees.
Market Order Example
It is more intuitive to look at the relationship between market makers and takers in numbers, so let's look at an example. Suppose you want to buy 1 BNB, and the current market price is about $370. Visit Binance and open the BNB/BUSD trading pair. Create a buy market order, enter 1 in the quantity field, and click [Buy BNB].
After you post your order, the exchange displays the order book. This book contains limit orders to buy or sell an asset at a specific quantity and price. In this case, your market order to buy 1 BNB at the market price (also known as the spot price) matches the lowest-priced limit sell order in the order book.
As you can see, the cheapest limit sell order in the order book is to sell 1.286 BNB at $371.40 (BUSD). A market buy order would buy 1 BNB from the 1.286 BNB on sale at the spot price of $371.40.
However, let's say you want to buy 500 BNB at the current market price. The quantity of the lowest limit sell order cannot meet your market buy order. Your market order balance will automatically be matched with the next lowest limit sell order, in ascending order of order book price, until all orders are filled. This process is called slippage, and it is why the market taker needs to pay higher prices and fees (or get a lower price).
Market Order vs. Limit Order
To recap, a limit order is an order to buy or sell a certain amount of a financial asset at a set price or, more ideally, at a set price. You can also choose to have the exchange fill part of the limit order or have to fill the entire order. In the latter case, if the exchange cannot fill the entire order, the limit order will not be executed.
A market order can only "eat up" an existing limit order. Limit orders are also a good option for some people who don't want to trade or invest at market prices. You can use limit orders to plan trades in advance without having to watch the market all the time.
Aside from these basic differences, market orders and limit orders are suited to different trading activities and goals. Limit orders are generally more suitable for:
1. Asset prices fluctuate dramatically. Placing a market order in a volatile market often results in unpredictable results. Prices may change between when an order is created and when it is executed. These nuances can create differences in arbitrage profits and losses. A limit order ensures that you get the price you expect.
2. Lack of liquidity of assets In this case, using market orders may cause slippage. For example, when there are fewer market makers in the order book, your order may not be easily executed at a price close to the current market price. In the end, the order may be sold at a lower average price than expected or bought at a higher average price than expected. On the other hand, if the slippage causes the price to exceed the set value, the limit order will not be fully executed.
3. If a strategy has been developed. Limit orders can be executed without interaction, and orders can be placed in advance. In other words, the strategy can still be executed even if there is no active trading. The same cannot be done for market orders.
When to use a market order?
As we can see, if you care more about the transaction than the price, it is recommended to choose a market order. This means that you should only use a market order if you are willing to pay the high cost of slippage. In other words, if you are in a hurry to get a transaction, a market order is undoubtedly the best choice.
Sometimes, the stop-limit order cannot be executed for a long time, but you are anxious to buy or sell as soon as possible. Therefore, whether you need to trade immediately or get out of the market, the market order can come in handy.
However, if you are familiar with cryptocurrencies and want to buy some altcoins with Bitcoin, do not use market orders because you may pay unnecessary fees. In this case, limit orders may be a better choice.
When trading highly liquid assets with tight bid-ask spreads, using market orders allows you to get a price close to or equal to the expected spot price. The wider the spread of an asset, the higher the risk of slippage.
How to place a market order on Binance
Let's say you create a market order to buy 2 BNB. After logging into your personal Binance account, go to the trading platform view. Select the BNB market (such as BNB/BUSD), find the [Spot] tab, and select [Market]. Next, set the purchase quantity to 2 BNB and click the [Buy BNB] button.
A confirmation message will then appear on the screen and your market order will be executed.
Advantages of Using Market Orders
Depending on the specific situation, market orders have the following three main advantages:
1. Market orders are easy to use. If you plan to trade high-market-cap tokens with excellent liquidity such as Bitcoin or Ethereum, using market orders is very safe.
2. You can buy and sell all assets according to your personal wishes. If you need to close or open a position as soon as possible, the market order will definitely do what you want.
3. Support instant trading. For example, when the market is about to close, the time to execute a transaction may be very tight. But it is certain that market orders are always the fastest way to execute transactions.
Disadvantages of using market orders
The main advantage of market orders is speed, but you lack control over your order. The main disadvantages are:
1. You may encounter assets with low volume and high slippage. You may find yourself paying more than you expected or receiving less than you expected. When there is insufficient volume in the order book, the system will fill orders in ascending or descending order.
2. You cannot plan your trades in advance. You cannot keep an eye on the screen and be ready to trade at any time. If the market goes against your trading strategy while you are sleeping or busy with other things, you will not be able to place a market order in time. In this case, you can plan to use limit orders or stop-limit orders in advance.
For more information about limit orders, please read What is a limit order?
For more information about stop-limit orders, please read What is a stop-limit order?
Summarize
Market orders are the most basic method of buying and selling financial assets. They are the best way to get in and out of the market quickly. However, this comes at the expense of the control you enjoy with other types of orders. The best approach is to consider the situation and know when it is best to use a market order or other order method.