That’s because of hidden orders that are also in the system. In fact, the data shows that an average spread-crossing order gets access to even more liquidity than is shown on the NBBO. Not surprisingly, crossing the spread will give an investor the highest probability of a fill. The data (Chart 2) shows that choosing different order types can significantly affect the liquidity and fulfillment of each order.Ĭhart 2: Trading is a trade-off between costs and liquidity We looked at agency orders in our primary market for liquid stocks with stable one-cent spreads and Best Bid and Offer (BBO) quotes to see how “natural” investors might fare with different order types. That means traders should be pretty good at knowing how much immediacy they need otherwise, they’ll be paying too much for their stocks.ĭifferent order types help you trade faster

In short, markets are good at pricing immediacy. What we discover is that there is a trade-off between liquidity and execution quality that exists on a continuum: The more liquidity you need, the more impact you should expect (and vice versa). The short answer is: It depends on how fast you need to trade.Ī more detailed answer includes all the choices algos can make to work orders that transition from very passive to getting instant fills. It’s better than chasing a stock as it gets more and more expensive.

But often, adverse selection isn’t so bad.

Getting a touch mark made