A market order is an instruction to buy or sell right away at the best price available. It usually fills straight away, but the price is not guaranteed. The SEC's investor education office puts it this way: "Generally, a market order will be executed immediately. However, the price at which a market order will be executed is not guaranteed." You are trading certainty of execution for certainty of price.
How a market order fills
A trading venue keeps an order book of resting buy and sell orders, most of them limit orders, each waiting at a set price. A market order does not wait. It trades against the best orders already in the book. A buy takes the lowest asks and a sell hits the highest bids.
FINRA says a market order "generally will execute at or near the current bid or ask prices in the marketplace". FINRA also notes that brokerage firms "typically enter your order as a market order unless you specify otherwise." That is why it is the default on most order tickets.
Why the fill can differ from the quote
The price you see is only the top of the book. Three things can push your fill away from it:
- Size. If your order is bigger than the quantity at the best price, the rest fills at the next price levels, and each one is worse. The average price you pay moves away from the quote.
- Speed. FINRA warns that "you might not get the price you saw or were originally quoted, especially in fast-moving markets," and that in volatile markets "millions of shares can trade in microseconds causing price swings."
- Thin books. When few orders rest near the current price, even a modest market order can move through several levels.
The gap between the price you expected and the price you got is called slippage. In crypto markets, which trade around the clock and where some pairs have shallow books, the same mechanics apply. The size of the gap depends on how deep the book is when your order arrives.
Market order vs limit order
| Market order | Limit order | |
|---|---|---|
| Execution | Usually immediate | Only at the limit price or better |
| Price | Not guaranteed | Guaranteed if it fills |
| Risk | Slippage | May never fill |
| Role in the book | Takes liquidity | Usually adds liquidity (rests in the book) |
FINRA describes a limit order as "an order to buy or sell a security at or better than a specified price." A buy limit "can be executed only at or below the limit price" and a sell limit "only at or above the limit price". The cost of that protection is that "there's a chance your order doesn't get executed at all."
Fees: it depends on the venue
The original version of this article said limit orders always cost less than market orders. That is not a general rule.
- FINRA's investor page says limit orders "generally might have higher execution costs than market orders" when placed through a broker.
- Many venues use maker-taker pricing. An SEC staff memorandum (20 October 2015) describes the model: the liquidity-providing "maker" (a resting limit order) receives a rebate, and the "taker" that executes against it pays a fee. A marketable order, such as a market order, is the taker.
- The same memo notes that some venues use an "inverted" model that charges makers and pays takers.
To know your actual cost, check the fee schedule of the venue or broker you use.
Is a market order the right ticket for this trade?
Answer four questions from the article's pre-order checks to see what a market order means for your trade.
Does this trade need to fill right away, even if the fill price is not guaranteed?
- Yes, filling now matters most → next question
- No, the price matters more than speed → A limit order matches that priority
Is your order bigger than the quantity shown at the best bid or ask?
Is the market moving fast, is news due, is it the open, or does the book look thin with a wide bid-ask spread?
- Yes, one or more of these → Slippage risk is higher right now
- No, the book is calm and deep → next question
Do you know whether your venue charges takers more than makers?
- Yes, and I have checked the cost → The article's checks are covered
- No or not sure → Check the fee schedule first
A limit order fills only at your limit price or better, so the price is guaranteed if it fills. The trade-off is that it may never fill at all.
The part of your order beyond the best price fills at the next levels, each one worse. The gap between the price you expected and the price you get is slippage.
In fast markets you might not get the price you saw, and in a thin book even a modest market order can move through several levels. A wide spread also means a higher immediate cost.
A market order takes liquidity. Under maker-taker pricing the taker pays a fee, while some venues use an inverted model. Only your venue's or broker's fee schedule shows your actual cost.
Your size fits the best price, conditions look calm and you know your taker cost. A market order will usually fill at or near the current bid or ask, but the fill price is still not guaranteed.
This walks through the article's general checks only: it cannot see a live order book, does not cover stop, stop-limit or timing instructions, and does not say whether any trade is a good idea.
Stop orders: market orders in waiting
A stop order rests until a trigger price is reached and then becomes a market order. FINRA: "When this stop price is reached, the order automatically turns into a market order and is executed as soon as possible at the current market price." A stop order that is meant to cap a loss is often called a stop-loss.
Two points matter here:
- The stop price is a trigger, not a fill price. The SEC says the execution price "can deviate significantly from the stop price due to the prices of available liquidity when the market order executes."
- Brief spikes can trigger it. FINRA notes that in volatile conditions a stock "can move significantly in a short period of time and trigger an execution of a stop order", even if the price recovers soon after.
FINRA Rule 5350 defines a stop order as one triggered by a transaction at the stop price. An order triggered by something else, such as a quotation, may not be labelled a "stop order".
Variants
- Stop-limit order. Once the stop price is reached, the order becomes a limit order instead of a market order. This limits slippage, but the order may not fill.
- Trailing stop. The trigger is set as a percentage or dollar amount from the market price. The SEC describes how, as the price moves in the investor's favour, the trailing stop price "adjusts or 'trails' the market price".
The SEC notes that stop, stop-limit and trailing stop orders "may not be available through all brokerage firms."
Timing instructions
Orders can also carry time instructions. The SEC's "Understanding Order Types" bulletin lists Day, Good-Til-Canceled, Immediate-Or-Cancel, Fill-Or-Kill, All-Or-None, On Open and On Close. Unless you choose otherwise, stock orders are Day orders that expire at the end of the trading day. For stocks placed outside regular hours (9:30 a.m. to 4 p.m. Eastern Time), FINRA notes that news can significantly change the price before your order executes.
Checks before sending a market order
- Compare your order size with the quantity shown at the best bid or ask.
- Look at the bid-ask spread. A wide spread means the immediate cost is higher.
- Be careful around news, the market open and fast moves, when prices change within milliseconds.
- Find out whether your venue charges takers more than makers.
Limitations: this explainer relies on SEC and FINRA investor materials written for US stock markets. Crypto venues set their own rules and fees.
