TL;DR
A market order allows you to buy or sell a financial asset instantly at the best available price. Market orders obtain limit order prices in the order book. This means that it is not possible to be 100% certain regarding the order execution price. When executing the order, it is possible that slippage may occur, resulting in a different price than expected.
Limit orders differ from market orders in that you can create them in advance, at a specific price. The limit order will only be executed by the broker at the specified price or better. It's easy to create market orders on Binance using the trading interface. Just click on [Market] in the [Spot] section.
The main advantages of market orders are their simplicity, speed, efficiency and ability, in most cases, to be completely filled. However, market orders have disadvantages regarding the risk of slippage and the fact that you need to be present when executing the order.
Introduction
Trading is a more complex activity than simply buying or selling an asset. There are several types of orders used for buying or selling any financial asset such as cryptocurrencies, stocks or forex. Fill or Kill and stop-limit orders are some examples, but market orders are the simplest and most frequently used by beginners. Let's see what market orders are and how they work.
Definition of market order
A market order is an order that immediately seeks the best available buy or sell price. To be filled, there must be liquidity in the market. In other words, the market order is executed based on the limit orders already added to the order book. If you want to buy or sell instantly, at the current market price, a market order is the best option. Let's assume the price of BNB is rising rapidly and you want to buy it as quickly as possible. In this case, you are willing to accept the current market price to buy BNB instantly. To do this, you create a market order on the broker's platform.
How a market order works
Unlike limit orders, which are entered into the order book, market orders are executed instantly, at the current market price. There are always two participants in a trade; the maker and the taker. When you create a market order, you act as a taker and are accepting the price set by someone else. For example, a broker will match a market buy order to the lowest available sell price on the order book. On the other hand, a market sell order will be matched with the highest buy offer from the order book.
As mentioned, market orders require a broker to have sufficient liquidity in the order book to meet instantaneous demand. Because the market order removes liquidity from the broker, as a market taker, when you create one, you will pay higher fees. Binance's fee schedule clearly demonstrates the difference between fees for makers and takers.
Example of market order
It is much simpler to see the relationship between a market maker and a market taker by analyzing numbers, so let's use an example. Imagine you want to buy 1 BNB and the current market price is around $370 (US dollars). You access Binance and open the BNB/BUSD pair. To create your market buy order, you enter 1 in the amount field and click [Buy BNB].
After creating your order, the broker will analyze the order book. The ledger contains limit orders with specific quantity and price for buying or selling an asset. In this case, your market order to buy 1 BNB at the market price (also known as spot price) will be combined with the cheapest sell limit order from the order book.
As we can see, the cheapest sell limit order is 1,286 BNB at $371.40 (BUSD). Your market buy order will purchase 1 BNB of 1,286 BNB on offer, at the spot price of $371.40.
But let's say you want to buy 500 BNB at the current market price. The cheapest sell limit order available does not have the volume to completely fill your market buy order. The remaining volume of your market order will automatically be combined with the next available sell limit orders, going through the entire order book list until it is completely filled. This process is called slippage and this is why you pay higher prices and fees as a market taker.
Market order vs. market order limit order
To recap, limit orders are orders to buy or sell a financial asset at a set price or better. You also have the option to configure whether the broker can partially fill your limit order or whether it must fill it completely. In the latter case, if the broker cannot fully fulfill your order, it will not execute it at all.
It is only possible to fill market orders when limit orders are available. Not every trader or investor accepts the price available in the market, therefore, the limit order is a good alternative. You can use limit orders to plan your trades in advance without needing to be at your trading desk or office.
In addition to these basic differences, market orders and limit orders are suitable for different trading activities and objectives. Limit orders are typically best for the following situations:
1. When the price of an asset presents high volatility. Creating a market order in a highly volatile market environment can produce unexpected results. The price may change between the time the order is created and its execution. These small variations can be the difference between profits and losses for arbitrage traders. A limit order ensures you get the price you want (or better).
2. When an asset has low liquidity. In this case, using a market order may cause slippage. This occurs when there is a low volume of market makers on the order book and their order cannot be easily filled at the current market price. You will end up trading at a lower average selling price or a higher average buying price than you expected. A limit order, on the other hand, will not be fully filled if slippage moves the price beyond the set limit value.
3. When you already have a strategy. A limit order does not require a command from you to start filling and can be set up in advance. In other words, your strategies can be executed even if you are not actively trading. The same cannot be said about market orders.
When to use a market order?
As we have seen, a market order is useful when quick execution of the order is more important than setting a specific price. This means that you should only use market orders if you are willing to pay the higher cost generated by slippage. In other words, market orders are recommended if you are in a hurry.
Sometimes you find yourself in a situation where you had a stop-limit order that was not executed and you need to buy/sell the asset as quickly as possible. When you need to enter or exit a trade position immediately, the market order is very useful.
However, if you already have experience in the crypto sector and want to buy some altcoins with your Bitcoin balance, avoid using market orders as you may end up paying more than necessary. In this case, a limit order is probably the best option.
When trading highly liquid assets, with a narrow spread between the buy and sell price, a market order can offer a price equal to or very close to the expected spot price. Assets with a larger spread have a much greater chance of generating slippage.
How to create a market order on Binance
Imagine you want to create a market order to buy 2 BNB. After logging into your Binance account, access the trading interface. Select the BNB market (e.g. BNB/BUSD), find the [Spot] tab and select [Market]. Then set the amount of 2 BNB for the purchase and click [Buy BNB].
You will then see a confirmation message on the screen and your market order will be executed.
Advantages of using a market order
Depending on the situation, there are three main advantages to using a market order:
1. Market orders are simple and easy to use. If you want to trade a highly liquid currency like Bitcoin or ETH with a large market capitalization, market ordering is a very safe option.
2. You can buy or sell the desired total amount of an asset. If you need to close all your positions or open one as quickly as possible, a market order almost always guarantees that you will be able to do so.
3. It is possible to complete a trade immediately. In some cases, there is a need to quickly execute a trade. For example, before a certain closing time. Market ordering will almost always be the quickest way to do this.
Disadvantages of using a market order
Although a market order has its advantages, especially in terms of speed, it lacks in terms of the control it can offer. Its main disadvantages are:
1. They can present a large slippage with low volume assets. You could end up paying more or getting much less than you planned. Without sufficient volume in the order book, you will need to move further up or down the list of available orders.
2. It is not possible to plan your trades in advance. You won't always be on the trading screen, ready to trade. If the market moves against your trading strategy while you are asleep or unavailable, you will not be able to create a market order. On the other hand, you can use a limit order or a stop-limit order to plan ahead.
For more information about limit orders, check out the article: What is a Limit Order?
To learn more about using stop-limit orders, see the article: What is a Stop-Limit Order?
Final considerations
Market order offers the simplest method for buying and selling financial assets. It is the best option to enter or exit a market immediately. However, all of this comes at the cost of losing the level of control that is offered by other order types. It is important to evaluate the specific situation you find yourself in and understand when it is better to use a market order or another type of order.
