Marketable order

What Is Marketable Order?

A marketable order is an instruction given to a broker to buy or sell a security immediately at the best available price in the market. It is a type of stock order that prioritizes execution speed over price certainty, ensuring that the trade occurs as quickly as possible. This falls under the broader financial category of market microstructure, which examines the process by which securities are traded and how this affects prices. A marketable order is typically executed against existing limit orders on the order book. When a buy marketable order is placed, it will be filled at the lowest available ask price, while a sell marketable order will be filled at the highest available bid price. Because a marketable order aims for immediate execution, it is also sometimes referred to as an "aggressive" order.

History and Origin

The concept of executing orders at the prevailing market price has existed as long as organized trading venues have. Historically, in the days of open outcry trading floors, a marketable order would have been shouted out by a floor broker, seeking immediate execution from another broker willing to take the other side of the trade. For instance, on the New York Stock Exchange (NYSE), which traces its origins to the Buttonwood Agreement of 1792, brokers would physically interact to facilitate these transactions.¹³ The evolution of trading technology, from the NYSE's early "designated order turnaround" (DOT) system in the 1970s to fully electronic markets, has significantly impacted how marketable orders are processed, making execution almost instantaneous.

Key Takeaways

• A marketable order is an instruction to buy or sell a security at the best available current market price.
• It prioritizes immediate execution over achieving a specific price.
• Marketable orders are executed against existing limit orders on the order book.
• They are commonly used when an investor wants to enter or exit a position quickly.
• The actual execution price of a marketable order may differ slightly from the quoted price due to market volatility.

Formula and Calculation

A marketable order does not involve a specific formula or calculation in the traditional sense, as its primary function is to execute at the prevailing price. However, understanding the bid-ask spread is crucial for comprehending the price at which a marketable order will likely be filled.

For a buy marketable order:
[ \text{Execution Price} = \text{Lowest Ask Price Available} ]

For a sell marketable order:
[ \text{Execution Price} = \text{Highest Bid Price Available} ]

The "spread" represents the difference between the bid and ask prices. A marketable order effectively "crosses the spread" to achieve immediate execution.¹²

Interpreting the Marketable Order

Interpreting a marketable order involves understanding its implications for execution certainty versus price certainty. When an investor places a marketable order, they are essentially signaling that they value the speed of the trade more than the exact price. This can be particularly relevant in fast-moving markets or when an investor needs to quickly react to news or events. For example, if a company releases unexpected earnings, an investor might use a marketable order to quickly buy or sell shares before the market fully incorporates the new information.

While a marketable order guarantees execution, the exact price received may deviate from the last traded price or the current National Best Bid and Offer (NBBO) due to market dynamics. This potential deviation is known as market impact, which refers to how an order's execution affects the security's price.¹⁰, ¹¹

Hypothetical Example

Imagine an investor, Sarah, wants to quickly buy shares of ABC Company. The current quotes for ABC are:

• Bid Price: $50.00 (buyers are willing to pay)
• Ask Price: $50.05 (sellers are willing to accept)

Sarah places a marketable order to buy 100 shares of ABC. Her order will immediately be filled at the lowest ask price available, which is $50.05. She will receive 100 shares at $50.05 each. If she had placed a marketable order to sell 100 shares, it would have been filled at the highest bid price, $50.00. This illustrates how a marketable order ensures immediate execution by accepting the prevailing offer for a buy or the prevailing bid for a sell. The investor prioritizes certainty of execution over the exact price, effectively "paying the spread."

Practical Applications

Marketable orders are widely used in various investment and trading scenarios. In day trading, where rapid entry and exit are common, marketable orders allow traders to capitalize on fleeting opportunities or minimize losses quickly. Algorithmic trading systems frequently employ marketable orders for high-frequency strategies, where milliseconds can significantly impact profitability.

Furthermore, institutional investors and portfolio managers may use marketable orders when rebalancing portfolios, particularly for highly liquid securities, to ensure prompt adjustment to their desired asset allocation. The Securities and Exchange Commission (SEC) has regulations in place, such as Rule 605 of Regulation NMS, which mandates disclosures for order executions in national market system stocks, providing transparency into how marketable orders and other order types are handled by market centers and broker-dealers.⁸, ⁹ These rules aim to ensure best execution, meaning brokers must strive to obtain the most favorable terms for their customers' orders under prevailing market conditions.⁶, ⁷

Limitations and Criticisms

While marketable orders offer the advantage of immediate execution, they come with significant limitations. The primary criticism is the lack of price control. In volatile or illiquid markets, the actual execution price of a marketable order can deviate substantially from the last quoted price, leading to slippage. This can result in an investor paying more for a buy order or receiving less for a sell order than anticipated.⁵

Another drawback is the potential for information leakage if a very large marketable order is placed. While individual retail orders are typically small and absorbed by the market without significant impact, large institutional marketable orders can signal strong buying or selling interest, potentially moving the market against the trader. Academic research often highlights the "market impact" of large orders, demonstrating how they can influence price discovery and liquidity.³, ⁴ This is why sophisticated traders often use algorithms to break down large orders into smaller, less noticeable "slices" to minimize their footprint.²

Marketable Order vs. Limit Order

The fundamental difference between a marketable order and a limit order lies in their priorities: execution speed versus price certainty.

A marketable order sacrifices precise price control for speed, whereas a limit order prioritizes a specific price but risks non-execution if the market does not reach that price. Marketable orders are filled by "taking" liquidity from the order book, while limit orders "provide" liquidity.¹

FAQs

What is the primary advantage of a marketable order?

The primary advantage of a marketable order is its guarantee of immediate execution. An investor who places a marketable order prioritizes getting the trade done quickly, regardless of minor price fluctuations.

When should I use a marketable order?

You should consider using a marketable order when immediate execution is critical, such as when reacting to significant news, exiting a position quickly to limit losses, or entering a trade where getting into the market without delay is more important than achieving a precise price.

Can a marketable order be partially filled?

Generally, a standard marketable order in highly liquid stocks is filled completely. However, in very illiquid securities or for extremely large orders, a marketable order could potentially be filled at multiple price points as it consumes available liquidity at increasing or decreasing prices on the order book.

Does a marketable order always get the "best" price?

A marketable order aims for the best available price at the moment of execution. However, it does not guarantee the absolute best possible price that might exist in the market, especially if prices are moving rapidly. The execution price is the lowest ask for a buy or the highest bid for a sell.

How does a marketable order affect market liquidity?

A marketable order "takes" liquidity from the market. By immediately executing against existing limit orders, it removes those orders from the order book, thereby consuming available liquidity. In contrast, a limit order that rests on the order book "provides" liquidity.