How do people place orders for ETFs: market or limit and if limit, how is that limit chosen?
As someone who is primarily an OEF investor, I like the idea that if I pay $100 to invest in a fund, then at the end of the day I have $100 worth. So I'm satisfied if I don't "overpay" for an ETF, i.e. I don't wind up with less than $100 in shares at the end of my purchase day. I don't have to make a killing, I don't have to try to buy at the bottom of the day.
Yesterday I bought a ton of an ETF, one with a very stable price. I finally just placed a market order, figuring that best/worst case I'd come out a
sawbuck ahead or behind. Not worth fretting over. Equity ETFs are very different. How do you approach these trades?
Comments
If I want to buy right away, I enter the limit price at ask, or in the middle of the spread.
If I can wait a while, I would just enter limit price GTC few cents below the bid. Often, it got filled within the week, but sometimes, the price ran away.
If you get too stingy in a bull market that ticks up constantly and you go a few cents below the bid, you can end up with stale open (buy) trades. This has been a recurring issue for me the past few months.
I confirm that an ETF has adequate liquidity before making a purchase.
Recent intraday highs/lows are checked to gauge an ETF's daily price range.
Limit orders are always used when buying/selling ETFs (I've only dealt with equity ETFs).
Trading is avoided during the first/last 45 min. or so that the market is open.
When purchasing ETFs, my limit order is sometimes priced within the bid/ask spread range
but it may be below the current bid price at times.
It may take several days to fill a "low-priced" order—sometimes these orders won't get filled.
I look at more "mainstream" ETFs. Even new sector ETFs like BILT (just started July 31) can have volume around 100K. (BILT took two weeks to reach that level.) Still, if one is looking at esoteric ETFs, JD_co's call to pay attention to the spreads is worth heading.
I had read about the rule of thumb of not trading within 30-60 minutes of the open or close. Unpredictable volatility from orders getting executed at the open and traders rushing to finalize positions near the close.
The ETF I purchased a couple of days ago (a bond ETF) had a spread of a penny. No way I could find to split the difference. But I was seeing transactions at half penny prices. So I gambled and placed a market order. I got the price between bid and ask (i.e. half penny pricing). Did one of the "asks" come down the half penny (how?), was there a matching market order to sell? How do non-whole cent transactions arise?
Right now I'm looking to buy an ETF that tends to have a bid/ask spread of a few cents. I might just take a look at the intraday chart around noon on the day I trade. Assuming the current price is somewhere comfortably between the highs and lows, put in a limit order between bid and ask (as Observant1 sometimes does). I'll likely be left with the feeling that I might have done better. But this seems like a reasonable, disciplined approach. So I won't beat myself over the head if it turns out I didn't get the best price.
It's nice to be reassured there is no "secret formula" for placing these trades. A little common sense, some discipline, and a willingness to accept the fact that one won't always be right should go a long way.
Usually (for etfs / CEFs) I enter “market” and let Fidelity shop price. Sometimes with thinly traded securities that turns up blank. You’ll get a message that the amount entered is “excessive” or something like that. Then, I toy around with lesser quantities and begin using various limit orders. Often, setting a limit price gets around the issue. I don’t know why.
Almost invariably Fidelity comes up with a better price than my order specified. So @msf sounds correct that it’s not worth fretting about (unless it’s a very large order). When trading outside regular market hours be very careful. You’ll get the limit price you specify. And, if Fidelity can’t obtain / sell what I want for the limit price, I sometimes start chipping away with progressively higher / lower bids. There’s actually an option displayed that allows you to “modify” the existing order.
I wouldn’t be overly discouraged if liquidity surfaces as an issue. I’ve yet to fail buying or selling the desired number of shares of an etf or CEF. Persistence (repeatedly bidding in smaller amounts) pays off and the price generally remains fairly stable. I’ve entered as many as 15 or 20 orders to buy or sell a security within an hour’s time and have yet to fail to get it to work as intended. 3 tries turn up empty, and then the 4th try works. How it seems to work.
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dGenerally i set several orders with progressively lower bid prices. Goal here is buy on the dip while catching the ‘lower prices” throughout the day.
Key is to be patient and follow the movement on real-time. In volatile days, this approach works particularly well.
Also shows pre-market pricing. Worth a look - but I haven’t always found those numbers reliable. Suspect there may be some price manipulation by players during pre-market. One time I bought a single share of something for another price (pre-market) and that price immediately became reflected as the “current price” on my tracker.
Professional traders who are skilled to exploit these movements do much better. Small gains in large block trades start to add up. But these traders have many supports. I still have much to learn, thus i stay within my competence.
@larryB, SCHD is traded in high volume on daily basis. Trading at market price throughout the day is probably close to the closing market price.
@hank, i am using the free version of Stock Tracker: real time - pretty old fashion layout but it works. The advanced version costs $90 a year.
Without wading into the weeds here, most likely you haven’t been fleeced (left money on the table). Your broker will execute your trade at the best price available. Unless it’s a highly volatile ETF or CEF - or an individual stock, the price isn’t likely to fluctuate much from what is displayed on screen as you enter your order. If you prefer not to set a limit price, you get the best price they can find. Setting limits can cause the trade to fail if the price of the security moves a bit - sometimes an unwanted result.
Setting a limit price does offer more protection against last minute price changes. It is also is a good way to leave an order “standing” if you have a better price in mind than what the security is currently selling for. If the pricing changes so it meets your limit offer, the trade automatically executes. You can specify whether or not your standing order cancels at day’s end or whether you want to leave it standing “until canceled”. In the second case, your bid will continue for days on end.
Everybody’s different. If you’re the meticulous type and want to dot every i, then you should always set limits. If you’re less meticulous and just want the order to execute now (myself usually) then just go with “market” price.
- Bid/ask spread. A concern for thinly traded securities. Limit orders between bid and ask (or lower depending on price trend) addresses this. IMHO not an issue for most ETFs, at least the ones I care about
- Efficient trade execution: Routing, price improvement. For better routing, might be a good idea to avoid brokers who take payment for order flow. (I'm talking to you, Chuck.) If one is heavily into trading, one could direct trades to preferred exchanges. For most investors, this seems to be overkill. Here are the routing options Fidelity gives. IBKR may be best if you're into this level of trading (I'm not). For price improvement, I agree with @hank that the brokerage can do this reasonably well. And they should have execution statistics available.
- Get a fair price - don't overpay "if you have a better price in mind than what the security is currently selling for." I can understand someone feeling that an individual company is worth $X and waiting for that price, but how does one extend that sense of fair price to ETFs or funds in general?
- Intraday trends - this is what I had in mind with my OP. @Sven wrote of "set[ing] several orders with progressively lower bid prices". Does that mean setting a bid below the current bid and hoping that there's a quick plunge in ask price? If the price doesn't plunge, then as it drops slowly (still above your bid), do you continually replace your bid with a lower bid?
Regarding volatility, even SCHD has a good amount of intraday volatility. For each day over the past year, I looked at how large a gap there was between its closing price and its intraday high (or low). These gaps averaged 0.92%. (Data from Yahoo, my analysis.)
I'd rather not give up the better part of a percent within a single trading day. It seems Sven is taking an approach to reduce this risk, but in doing so adding a risk of missing out on a purchase entirely. Still, the approach has merit if one has the (real)time and patience to pull it off.
Finally, I've found Fidelity's Active Trader Pro adequate for monitoring a security's trades. Not something I'd use for HFT, but adequate for my measly once in a blue moon trades.
Re: ”I can understand someone feeling that an individual company is worth $X and waiting for that price, but how does one extend that sense of fair price to ETFs or funds in general?”
You’re correct. I was thinking of individual equities when I offered up that suggestion. I wouldn’t think that “waiting for a better price” would be practical with etfs. Possibly with some CEFs that one already owns, trying to “snag” some additional shares at a more attractive price might be worth the effort.
My portfolio seldom change nowadays. It’s a pretty static buy and hold (7 equal weight segments). A major change may take days or weeks of research and thought. So, after thoroughly considering and deciding on such a move, I’m not going to fret about smallish price variations. Indeed, when buying / selling in large quantities, price fluctuations along the way are expected. If you chose “market” Fidelity will buy at the various prices along the way. If limit, your full order may not get filled. (If contemplating a T-Bill, CD, ultra-short bond fund, then even minor fluctuations in price are worth worrying about.)
A note on the 2 baskets. The individual parts of a basket are small. But I wouldn’t begin to assemble one without knowing first what all the components will be. So it’s a bit like a race to buy those 10 ETFs / CEFs in an expeditious way once begun.