FWIW If you are buying normal stocks like META and arent extremely rich it just does not matter if you place a market order during normal trading hours. Who gives a fuck. I usually just market buy stocks unless they are incredibly low MC.
Every time I talk to my many friends at Jane Street, Jump, Bwater they think my trading ideas are perfectly reasonable. Many times they say they wish their fund would put on the trade. Or they tried and failed to push the idea. The ideas are rarely exotic. Often the other party has in fact also thought of the idea and is trading it in their personal account.
> Never, ever, submit a market order. You’re strictly better off submitting a limit order (which specifies the price above/below which you would not buy/sell).
I get the vibe you're going for, but this isn't strictly true. And I think the nuances here are interesting!
1) Staleness risk. A limit order that doesn't get filled immediately could hang around and then only get filled in adverse situations. e.g. If you put in a limit order to buy stock at below market price, you might only get filled when the stock crashes to far below your buy price. Limit orders that expire after a short time are a reasonable choice, though.
2) Variation in surplus value vs value of your time. In many cases, you can trust markets to be pretty efficient and to provide you lots of surplus value. If your error bars about the value of a trade are unlikely to swamp the surplus value you get from it, and especially if the time-value of thinking more about this or shopping around is high compared to the size of those error bars, it makes sense to just take what the market will give you rather than thinking carefully about your happy price or hunting for the best deal.
Examples depend *a lot* on your value of time, but I think it's oftne reasonable for e.g. a non-finance-expert to just buy S&P 500 ETF shares at market price, or someone making $40/hour to not sweat which pack of AA batteries they buy.
1) Oh, yeah, I am talking about IOC (immediate-or-cancel) limit orders, I definitely don't think IOC market orders are strictly dominated by GTC (good 'till cancelled) limit orders in terms of exposure to adverse selection. I just mean any time you send an IOC market order you're better off sending an IOC limit order. I will clarify in the post, thanks!
2) I think this is absolutely true in terms of the time required to get a precise estimate, to be confident you've priced this thing correctly, etc. But the thing I'm pushing for here is not "make sure to calculate the EV exactly," it's "give *some* limit, *any* limit" (like, 2x the price, or even 10x the price, whatever). This is pretty minimal extra effort for protecting you against various mistakes that will expose you to being adversely selected against (e.g. trading illiquid stock WDGT instead of the liquid stock WDGTS, in which you're not going to get filled at fair, you're going to get filled adversely at far higher prices in a market you did not intend to participate in and know nothing about).
That said, I do think there are various situations (in particular cooperative interpersonal ones) where minimizing friction and/or signaling trust to your counterparty are valuable, so saying "can you grab me a banana from the store" (instead of "can you grab me a banana iff it costs less than $10") or "can you book a lyft for me, I'll pay you back" (instead of "can you book a lyft for me and I'll pay you back up to $500") seem like reasonable ways to interact with other humans, and I'll concede that this is probably pretty safe.
In the wheelbarrow examples, the thing I'm describing is winner's curse—my point is that the winning bidder overpays relative to the true value, while the median bidder neither profits nor loses. (A bidder whose model is mistaken such that they substantially underbid profits $0, like the median winner). That is, there's an asymmetry between your PnL when your model is correct and when your model is incorrect.
The point is: conditional on winning the auction, you outbid every other person. You are at the extreme end of bids. The price you bid ($180) is a combination of your model of the wheelbarrow's price ($200, with some uncertainty) and the amount of edge you ask for on account of winner's curse concerns (10%, or $20). If you are the winner, it means everybody else either models the price as lower, or asks for greater edge, or (most likely) some blend of the two. If it's just because they're asking for more edge, your bid may still be profitable. But it's likely some combination of the two, and their price models all (or almost all) being lower than yours should cause you to update that the true value of the wheelbarrow is lower than you'd previously estimated.
The field one is about the danger of sending market orders. If you send a market order, you might get filled at the fair value, or you might get filled at a bad price. You're never going to get filled at a better price than fair. Instead of sending a market order, you should specify an upper limit, since there is some true upper limit above which you wouldn't want to pay for the item.
This can also apply socially BUT thinking in these terms will tend to make one's social life worse; still figuring out how to navigate that
FWIW If you are buying normal stocks like META and arent extremely rich it just does not matter if you place a market order during normal trading hours. Who gives a fuck. I usually just market buy stocks unless they are incredibly low MC.
Every time I talk to my many friends at Jane Street, Jump, Bwater they think my trading ideas are perfectly reasonable. Many times they say they wish their fund would put on the trade. Or they tried and failed to push the idea. The ideas are rarely exotic. Often the other party has in fact also thought of the idea and is trading it in their personal account.
> Never, ever, submit a market order. You’re strictly better off submitting a limit order (which specifies the price above/below which you would not buy/sell).
I get the vibe you're going for, but this isn't strictly true. And I think the nuances here are interesting!
1) Staleness risk. A limit order that doesn't get filled immediately could hang around and then only get filled in adverse situations. e.g. If you put in a limit order to buy stock at below market price, you might only get filled when the stock crashes to far below your buy price. Limit orders that expire after a short time are a reasonable choice, though.
2) Variation in surplus value vs value of your time. In many cases, you can trust markets to be pretty efficient and to provide you lots of surplus value. If your error bars about the value of a trade are unlikely to swamp the surplus value you get from it, and especially if the time-value of thinking more about this or shopping around is high compared to the size of those error bars, it makes sense to just take what the market will give you rather than thinking carefully about your happy price or hunting for the best deal.
Examples depend *a lot* on your value of time, but I think it's oftne reasonable for e.g. a non-finance-expert to just buy S&P 500 ETF shares at market price, or someone making $40/hour to not sweat which pack of AA batteries they buy.
1) Oh, yeah, I am talking about IOC (immediate-or-cancel) limit orders, I definitely don't think IOC market orders are strictly dominated by GTC (good 'till cancelled) limit orders in terms of exposure to adverse selection. I just mean any time you send an IOC market order you're better off sending an IOC limit order. I will clarify in the post, thanks!
2) I think this is absolutely true in terms of the time required to get a precise estimate, to be confident you've priced this thing correctly, etc. But the thing I'm pushing for here is not "make sure to calculate the EV exactly," it's "give *some* limit, *any* limit" (like, 2x the price, or even 10x the price, whatever). This is pretty minimal extra effort for protecting you against various mistakes that will expose you to being adversely selected against (e.g. trading illiquid stock WDGT instead of the liquid stock WDGTS, in which you're not going to get filled at fair, you're going to get filled adversely at far higher prices in a market you did not intend to participate in and know nothing about).
That said, I do think there are various situations (in particular cooperative interpersonal ones) where minimizing friction and/or signaling trust to your counterparty are valuable, so saying "can you grab me a banana from the store" (instead of "can you grab me a banana iff it costs less than $10") or "can you book a lyft for me, I'll pay you back" (instead of "can you book a lyft for me and I'll pay you back up to $500") seem like reasonable ways to interact with other humans, and I'll concede that this is probably pretty safe.
Thanks for this. Funny and nice examples.
Though the wheelbarrow #2 feels like maybe I'm missing something.
And the field one feels very different.
In the wheelbarrow examples, the thing I'm describing is winner's curse—my point is that the winning bidder overpays relative to the true value, while the median bidder neither profits nor loses. (A bidder whose model is mistaken such that they substantially underbid profits $0, like the median winner). That is, there's an asymmetry between your PnL when your model is correct and when your model is incorrect.
The point is: conditional on winning the auction, you outbid every other person. You are at the extreme end of bids. The price you bid ($180) is a combination of your model of the wheelbarrow's price ($200, with some uncertainty) and the amount of edge you ask for on account of winner's curse concerns (10%, or $20). If you are the winner, it means everybody else either models the price as lower, or asks for greater edge, or (most likely) some blend of the two. If it's just because they're asking for more edge, your bid may still be profitable. But it's likely some combination of the two, and their price models all (or almost all) being lower than yours should cause you to update that the true value of the wheelbarrow is lower than you'd previously estimated.
The field one is about the danger of sending market orders. If you send a market order, you might get filled at the fair value, or you might get filled at a bad price. You're never going to get filled at a better price than fair. Instead of sending a market order, you should specify an upper limit, since there is some true upper limit above which you wouldn't want to pay for the item.
Hmmm kk