Summary
A market order allows you to buy or sell a financial asset instantly at the best price currently available. Market orders derive prices from limit orders on the order list. This means that you cannot be 100% sure of the price you will get. Slippage can occur when you get a price different from what you expected.
Limit orders differ from market orders in that you can place them in advance at a specific price. The trading platform will execute your order only when the asset reaches the specified price or a better price. And you can easily place market orders on Binance on the trading page. This page can be accessed by clicking on [Market] under the [Instant] section.
The main advantages of market orders are that they are simple, immediate, efficient, and can be fully executed in most cases. But market orders have the disadvantage of being exposed to the risk of slippage and the need to be present when the order is executed.
the introduction
Trading is more complex than simply buying or selling. When you buy or sell any financial assets such as digital currencies, stocks, or hard currencies, you will find different types of orders. From full execution or termination orders to stop limit orders, market orders are considered one of the simplest types of orders and are often used by beginners. Let's learn about market demands and how they work.
Definition of market demand
A market order is an order to immediately buy or sell at the best available price. A market order requires liquidity for its execution, which means that it is executed based on limit orders previously added to the order list. If you want to buy or sell immediately at the current market price, your best option is to submit a market order. For example, the price of BNB may be increasing rapidly, and you want to buy it as soon as possible. You are willing to buy at the market price as long as you buy BNB immediately. In this case, you will place a market order on the trading platform of your choice.
How does market order work?
Unlike limit orders which are placed on an order list, market orders are executed immediately at the current market price. In every trading process, there are two parties: the maker and the beneficiary. When you place a market order, you benefit from the price set by someone else. For example, the trading platform matches a market order to buy at the lowest ask price in the order list. Conversely, the platform matches a market order to sell to the highest bid price in the order list.
As mentioned, market orders need the trading platform to have liquidity in the order list to meet immediate demand for the asset. As market orders withdraw liquidity from the trading platform, you will pay higher fees as a market user when you place a market order. Binance's fee schedule clearly shows the difference between maker fees and patron fees.
Example of market demand
It's simpler to explain the relationship between market maker and market taker with numbers, so we'll look at an example. Imagine you want to buy 1 BNB, and the current market price is approximately $370 (USD). You will head to Binance and open the BNB/BUSD trading pair. To place a market order to buy, you will enter 1 in the amount field and click [Buy BNB].
After placing your order, the trading platform will search the list of orders. This record includes limit orders at a specific quantity and price to buy or sell an asset. In this case, the market order you placed to buy 1 BNB at the market price (aka spot price) will be matched by the lowest limit sell order in the order list.
As you can see, the lowest sell limit order on the list calls for selling 1.286 BNB at a price of $371.40 (BUSD). The buy market order you placed will buy 1 BNB out of 1,286 BNB on offer, at a spot price of $371.40.
But let's say you want to buy 500 BNB at the current market price. The cheapest limit order to sell among the available orders is not enough to fully execute the market order to buy. The remaining volume of the market order will then be automatically matched with the next best limit sell order in terms of price, from the bottom to the top of the order list until the order is fully executed. This process is called slippage, which is why you pay higher prices and fees (or get a lower price) when you are the beneficiary of the market.
Market demand and marginal demand
The bottom line is that limit orders are requests to buy or sell a quantity of a financial asset at a specific price or at a better price. You can also choose whether the trading platform can partially execute your limit order or must execute the entire order. In the second case, if the platform cannot fully execute your order, it will not be executed at all.
Market orders can only be executed with already existing limit orders. Not everyone may want to accept the market price when trading or investing, so marginal demand is a good alternative for some. You can use limit orders to plan trading operations in advance without having to be present at your desk to carry out trading operations.
Beyond these basic differences, market orders and limit orders suit different trading activities and objectives. Limit orders are usually used in the following cases:
1. When the asset price is highly volatile. Placing a market order in a highly volatile market can lead to unexpected results. The price may change in the short period between creating the order and executing it. These slight differences in price may change the gain into a loss for the balancers. Marginal demand ensures that you get the price you want or a better price.
2. When the liquidity of the asset is low. In this case, the market order can lead to slippage. This occurs when the volume of market makers' orders in the order list is low, and your order cannot be easily executed at a level close to the current market price. Then you will end up with a lower average sale price or a higher average purchase price than you expected. The limit order will not be fully executed if the slippage causes the price to rise or fall beyond the limit you specify.
3. If you already have a strategy. Limit orders do not require confirmation of the start of execution and can be submitted before the execution date. This means that your strategies will be implemented even if you are not an active trader. But you can't do the same with market orders.
When to use market order?
As we have seen, market orders are useful when executing the order is more important than obtaining a specific price. This means that you should use market orders if you do not mind incurring a higher cost due to slippage. In other words, market orders are useful when you're in a hurry.
Sometimes you may find yourself in a situation where you have a stop limit order that has been exceeded, and you have to buy or sell as soon as possible. So if you need to execute a trade right away or get yourself out of trouble, this is where market orders come in handy.
But if you are not a complete beginner in the world of cryptocurrencies and want to buy some altcoins in exchange for Bitcoins, avoid using market orders because you will pay more than necessary. Marginal demand in this case is probably better.
When you trade highly liquid assets with a narrow spread between the ask and bid prices, the market order can give you a price that is closer to or at the expected spot price. As for assets that have a wider difference between the ask and offer prices, the chances of you being exposed to slippage when trading them greatly increase.
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, head to the trading page. Select the BNB market you want (e.g. BNB/BUSD), find the [Instant] page, and select [Market]. Then set the purchase amount as 2 BNB and press the [BUY BNB] button.
After that, a confirmation message will appear on the screen, and your market order will be executed.
Advantages of using market orders
Using market order has three main advantages depending on the situation:
1. Market orders are easy to use. If you are looking to trade a highly liquid currency like Bitcoin or ETH that has a large market cap, a market order is a very safe option.
2. You can buy or sell the entire amount of an asset you want. If you need to close all your trades or open a new one as soon as possible, market order ensures that you can do so in almost no time.
3. You can trade immediately. You may be under time pressure to execute a trade, such as wanting to complete it just before closing time. Then trust that market order is always the fastest way to execute trades.
Disadvantages of using market order
Although market demand's strength lies in its speed, its weakness lies in its lack of control. Its disadvantages lie in the following points:
1. You can experience slippage when trading low-volume assets. You may find that you pay more than you planned or get less than you wanted. Without sufficient size in your order list, you may find your order filled with orders above or below the desired price when buying or selling.
2. You cannot plan your trades in advance. You cannot always stay in front of the screen ready to trade. If the market moves contrary to your trading strategy while you are asleep or busy, you will not be able to place a market order. But you can use limit order or stop limit order to plan ahead.
For more information about marginal demand, please see: What is marginal demand?
For more information on how to use stop limit orders, please see: What is a stop limit order?
Concluding thoughts
Market order is the simplest way to buy and sell financial assets. It is the best option to enter and exit the market immediately. But these advantages come at the cost of losing the level of control enjoyed by other types of orders. The best thing you can do is to study the specific situation you are in and understand the appropriate times to use a market order or resort to other types of orders.
