In this article you will learn about what a Market Order is and examples of how Market Orders work.
What is a Market Order?
A market order is a type of order that is intended to be executed immediately at the best available price in the order book.
Unlike limit orders, which specify a price at which you wish to buy or sell and may remain in the order book until they are matched or cancelled, market orders prioritize speed over price.
Execution: Market orders are executed instantly at the prevailing market price.
Liquidity: For a market order to be executed, there must be sufficient liquidity, which means there should be limit orders available in the order book to match the market order.
Maker and Taker: In the trading context, there's always a maker (one who provides liquidity by placing a limit order) and a taker (one who takes away liquidity by matching a limit order with a market order). When you place a market order, you act as the taker.
Slippage: If the available limit orders at the best price are not enough to fulfill a market order, the market order will continue to match with successive limit orders at increasingly less favorable prices until it is fully executed. This phenomenon can lead to the final execution price being different from the initial best available price and is known as "slippage."
Market Orders are available on the Backpack Exchange.
Example of a Market Order:
Imagine you want to buy 100 units of crypto asset ABC. The top three sell orders in the order book are:
50 units at $10
30 units at $10.50
20 units at $11
If you place a market order to buy 100 units of ABC, your order will first match with the 50 units at $10.
Since this isn't enough to complete your order, it will then match with the next 30 units at $10.50.
Finally, to fill the remaining 20 units of your order, it will match with the 20 units at $11.
This results in a blended average price that is higher than the initial best available price of $10 due to slippage.
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