Foreword
Do you ever wonder what happens on Level 1 and Level 2 when you send a market order? In this article, we are going to go through several scenarios on level 1 and level 2 when you sent a market order.
Recap
Level 1 and Level 2
Level 1 is a trading screen used for stock trading. Market data including bid price, bid size, ask price, ask size, last price, and the last size are all listed on Level 1.
Level 2 is an order book. All pending orders are all listed on Level 2. You can find in-depth market data, for example, exchange, bid price, ask price, amount of share on Level 2.
Related article: Reading Level 1 and Level 2
Market Order
A Market Order is an order that you sent to your broker to purchase or sell a security with its current price. Often, your order would be immediately filled.
Related articles: Market Orders
Changes in Level 1 and Level 2 with a Market Order
Sending a market order to your broker means you are buying shares with the security‘s market price. In this case, the changes in the Level 1 and Level 2 would not be complicated.
All your order does is removing the shares of the bid or the ask. If they are all removed, your market order would remove shares of the next bid and ask.
Examples
BUY
1. Buy with a Market Order (Share bought < Ask Size)
Assume you are buying 1000 shares of BCTX with a market order. The current ask size is 16000+500 = 16500 shares.
(You may refer to this article if you don’t know why it is 16000+500 but not 16000 shown on Level 1).
Your market order removes 1000 shares of the ask. The total price you need to pay is 1000*6.45+ ECN fees= More than $6450. ECN fee is charged in this case since your order has removed liquidity from the market. The ask size was then reduced to 15000+500 = 15500 shares.
2. Buy with a Market Order (Share bought > Ask Size)
The situation would be a bit different when your order size is larger than the ask size.
Assume you buy 16600 shares of BCTX with a market order. The current ask size is 16000+500 = 16500 shares.
(You may refer to this article if you don’t know why it is 16000+500 but not 16000 shown on Level 1).
In this scenario, your order would remove all shares of the ask $6.45 and bought 100 shares with the next ask of $6.46. ECN fee is charged in this case since your order has removed liquidity from the market. The total price you need is 16500*6.44 + 100*6.45 + ECN fee = More than $106905.
Sell
1. Sell with a Market Order (Share sold < Bid Size)
Assume you sell 100 shares of BCTX with a market order. The current bid size is 3400+2000+200 = 5600 shares.
(You may refer to this article if you don’t know why it is 3400+2000+200 but not 3400 shown on Level 1).
Your market order removes 100 shares of the bid. Your gain would be 100*6.44- ECN fees= Less than $644. ECN fee is charged in this case since your order has removed liquidity from the market. The ask size was then reduced to 5000+500 = 5500 shares.
2. Sell with a Market Order (Share sold > Bid Size)
Assume you sell 6000 shares of BCTX with a market order. The current bid size is 3400+2000+200 = 5600 shares.
(You may refer to this article if you don’t know why it is 3400+2000+200 but not 3400 shown on Level 1).
In this scenario, your order would remove all shares of the bid $6.44 and sold the remaining 400 shares with the next bid of $6.43. Your gain would be 5600*6.44 + 400*6.43 – ECN fee = Less than $38636. ECN fee is charged in this case since your order has removed liquidity from the market.
Final Thought
In this article, we provided you some examples of how your market orders would affect Level 1 and Level 2. The result varies with different share sizes. We hope you will find this article helpful when you are trying to learn more about sending market orders.
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