Seeking practical help understanding “bid-ask spread” for ETFs

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CoastalWinds
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Seeking practical help understanding “bid-ask spread” for ETFs

Post by CoastalWinds » Sat Jun 22, 2019 12:35 pm

Hi BHs

At present, I hold only VG mutual funds (MFs), but with the recent divergence of expense ratios (ERs) between Admiral shares and ETFs, I’ve been reading up about the differences between MF and ETFs (relative pros/cons).

I feel like ETFs fit my needs equally well while offering the long-term benefit of lower ERs. Over long periods of time with large sums invested, I don’t believe the cost difference is trivial. Specifically, I’m referring to Total Stock Mkt (VTSAX = 0.04% vs VTI = 0.03%), and Total Intl Stock (VTIAX = 0.11% vs VXUS = 0.09%).

But there is one aspect of ETFs that I seem to be unable to wrap my head around, that being the bid-ask spread. I’ve read about this but am struggling to understand its implications in practical terms. I would say this has been the sole reason I have not started investing in ETFs (per the mantra “only invest in what you understand”). I feel like the Wiki could use some improvement in this area, but I digress.

From what I’ve read (but please correct me if I’m wrong), it is essentially a cost on both the buy side and sell side. I’ve also read that the cost is not consistent over time: sometimes the spread is large / unfavorable, while other times it is small. But I don’t have a context for what is a reasonable spread with which to buy (by BH standards) vs when it is too large and I should wait.

Also, do I pay the spread as a buyer but get the benefit of the spread as an eventual seller, or is it a cost to me on both ends?

Is there some practical guidance (“do this”, “do not do this”, “look for this”, lessons learned the hard way, etc.) that folks can share with me that might give me the confidence to start purchasing ETFs?

Thank you in advance for sharing.

CW

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by Blender » Sat Jun 22, 2019 1:06 pm

Unless you're a market maker it's a cost on both ends. Worrying about the size of spreads is generally not practical except when comparing like investments. The volume generally drives the spread, the more volume the more market makers will be participating and the more competition among them to trade, and spreads are one way they make their money.

For example, let's take VTI. If I remember correctly it generally has a $.01 spread, so let's say its bid/ask is 150.69/150.70. If you purchase 100 shares you would pay the ask and it would cost you $15,070. If you turned right around and sold (assuming the market hasn't moved) you would sell @ the bid and get back $15,069, $1 less. However in all practical terms the bid/ask are constantly moving up/down so the spread really becomes irrelevant, you can put limits in around the bid/ask and likely get hit within a few minutes as the prices gyrate up and down.

Bottom line, don't worry about about spreads unless it's sparsely traded, and even then it shouldn't matter much if you're a buy and hold investor. You're talking tiny fractions of a percent (0.00007% in the above example) and only when bought or sold.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by livesoft » Sat Jun 22, 2019 1:21 pm

I think one can ignore any issues with the bid/ask spread for most of the ETFs that one would want to own. There is an entire thread of examples and ideas here -> viewtopic.php?t=165732

That thread shows that things are not always bought and sold at the ask and bid prices. There is order improvement and things can sell between the bid/ask spread even if the spread is only 1 cent. For example, at 150.695 or 150.699.

I do not think the spread is a cost on both sides. One can get the other party to your transaction to pay the spread quite often. The market maker will make money by kickbacks from high-frequency traders and stock exchanges for providing them order flow. Just because somebody says something on bogleheads.org does not make it true.
Last edited by livesoft on Sat Jun 22, 2019 1:24 pm, edited 1 time in total.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by FIREchief » Sat Jun 22, 2019 1:23 pm

This is an excellent question(s), and one I've tried to understand better. I think the "who pays" is somewhat philosophical. If a buyer places a market order, they're paying the lowest priced seller, and their offer is higher than other current buyers by the amount of the "bid-ask" spread. If a seller places a market order, they're selling to the highest priced buyer, and their offer is lower than other current sellers by the amount of the "bid-ask" spread. If you approach it this way, you "pay" the bid ask spread for both transactions.

Here is how I have come to understand it: A liquid marked (of which most large/active ETFs would be included) has many willing buyers and sellers. When a buyer agrees to pay a seller's limit offer asking price (ask), a sale occurs. When a seller agrees to take a buyer's limit offer purchase price (bid), a sale occurs. If either buyer or seller place a market order, the sale will occur immediately at the best price. Otherwise, there is the lowest priced seller offer and the highest priced buyer offer; the difference being the bid-ask spread. As a buyer or seller of a highly liquid ETF, it is generally safe to just place market orders and take the best price the market currently offers. Some will caution to always use limit orders, perhaps citing the "flash crash" that happened a few years back, where market prices were suddenly far out of norm for a short period of time. I can't argue against that, but I don't typically invest in ETFs, so have little experience.

I looking forward to clarifications and other explanations.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by livesoft » Sat Jun 22, 2019 1:39 pm

FIREchief wrote:
Sat Jun 22, 2019 1:23 pm
I looking forward to clarifications and other explanations.
The quoted bid and quoted ask are not always for real. That's because another party such as a HFTrader or one's broker can step in and give a better price. Plus what one "sees" in their trading platform for quotes is quotes to the nearest 1 cent. If you have the right tools, then one can that that with a bid/ask spread of 1 cent that trades can happen at any prices between that spread and often do. See the linked thread.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by vineviz » Sat Jun 22, 2019 1:45 pm

CoastalWinds wrote:
Sat Jun 22, 2019 12:35 pm
Also, do I pay the spread as a buyer but get the benefit of the spread as an eventual seller, or is it a cost to me on both ends?
The spread represents the difference, at a particular point in time, between price you can get if you sell and the price you will pay if you buy. You can and should expect to pay the spread once over the course of holding the investment, but you don't pay it twice.

Keep in mind that for any ETF you own the proper way to value that fund is the prevailing bid price but this might not be the price your broker shows you (this is the last trade price, usually). If you make the mistake of mentally accounting for the ETF as being worth the ask while you hold it then it will FEEL like you paid the bid-ask spread twice. You didn't.

Also, keep in mind that the bid/ask spread exists in mutual funds too. The two main differences are:

1) the ETF's bid/ask spread is fully transparent, whereas the mutual fund bid/ask spread is entirely concealed.

2) the ETF's bid/ask spread is fully paid for by the investor making the transaction, whereas the mutual fund bid/ask spread is silently allocated to all investors (even buy-and-hold investors).
CoastalWinds wrote:
Sat Jun 22, 2019 12:35 pm
Is there some practical guidance (“do this”, “do not do this”, “look for this”, lessons learned the hard way, etc.) that folks can share with me that might give me the confidence to start purchasing ETFs?
If you stick to investing in ETFs based on highly liquid securities (Vanguard pretty much only offers ETFs that meet this rule), the bid/ask spread is almost never going to be worth thinking about. That said, spreads tend to be slightly wider during the first and last 30 minutes of the trading day so if you can avoid entering an order before 10am or after 3:30pm eastern time you'll probably face smaller bid/ask spreads and lower price volatility on your open orders.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by livesoft » Sat Jun 22, 2019 1:46 pm

And one more thing while we are on the subject: Limit orders. People here have the false belief that limit orders should always be used. They are just another tool to consider. I will give an example of something I find interesting:

Say bid/ask is 140.10 and 104.11, so one enters an order to buy at 140.10 some shares. The order could languish because no one wants to sell at 140.10, they all want to sell at 104.11, so the limit order just sits there. But if one switches the order to a market order, it could be executed immediately at 140.10 which was the original limit price. How is that possible you ask? I think it is because whoever sold to you at 140.10 got some money from elsewhere as a kickback for order flow or something else.

That is, there is more than meets the eye with any published bid prices and any published ask prices.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by FIREchief » Sat Jun 22, 2019 1:49 pm

livesoft wrote:
Sat Jun 22, 2019 1:39 pm
FIREchief wrote:
Sat Jun 22, 2019 1:23 pm
I looking forward to clarifications and other explanations.
The quoted bid and quoted ask are not always for real. That's because another party such as a HFTrader or one's broker can step in and give a better price. Plus what one "sees" in their trading platform for quotes is quotes to the nearest 1 cent. If you have the right tools, then one can that that with a bid/ask spread of 1 cent that trades can happen at any prices between that spread and often do. See the linked thread.
Thanks livesoft. This is one of those areas where (admittedly), I am somewhat ignorant and interested in learning more. The only area where I routinely deal with bid-ask spreads is buying in the secondary TIPS market. Fidelity's software appear to default to a fill or kill limit order at the current ask price, which usually results in me having to cancel and reinput orders about every third or fourth time (depending upon how fast I step through the screens).
Last edited by FIREchief on Sat Jun 22, 2019 1:52 pm, edited 1 time in total.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by livesoft » Sat Jun 22, 2019 1:50 pm

vineviz wrote:
Sat Jun 22, 2019 1:45 pm
That said, spreads tend to be slightly wider during the first and last 30 minutes of the trading day so if you can avoid entering an order before 10am or after 3:30pm eastern time you'll probably face smaller bid/ask spreads and lower price volatility on your open orders.
The spread at the opening cross is zero: $0.00, so the above statement is not quite true. Also I find that in the last minute of the market some folks get frustrated that their limit orders haven't executed, so they drop their pants. The dropping of pants is a way that the bid/ask spread is narrowed.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by FIREchief » Sat Jun 22, 2019 1:53 pm

livesoft wrote:
Sat Jun 22, 2019 1:50 pm
Also I find that in the last minute of the market some folks get frustrated that their limit orders haven't executed, so they drop their pants. The dropping of pants is a way that the bid/ask spread is narrowed.
:D Is that an actual insider term??
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by CoastalWinds » Sat Jun 22, 2019 1:59 pm

No wonder I’m confused.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by livesoft » Sat Jun 22, 2019 2:16 pm

Here's one for you: Suppose the bid/ask for VTI is $150.70 / $150.71. Further suppose you submit an order to buy 4 shares of VTI at $150.70, but I submit a market order to buy 4 shares. My broker gives me a price of $150.701, so my order gets executed before your order. How much did I actually pay for my 4 shares? Answer: I actually paid $150.70 because of rounding off to the nearest cent. That is, I scooped you (my order got ahead of yours) because 4 x $150.701 = $602.804 which is $602.80 to the nearest cent.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by alex_686 » Sat Jun 22, 2019 2:19 pm

livesoft wrote:
Sat Jun 22, 2019 1:50 pm
The spread at the opening cross is zero: $0.00, so the above statement is not quite true.
So the bid/ask spread is a implicit cost, which can never be directly seen. It is the drag from trading. You are technically correct - the observed cost of trading at the open is zero. That does not mean there is no cost. This is often a disconcert between opening prices and the price a few seconds latter. So there is a drag, thus a cost.

To the OP, I would not worry about this too much. The drag from the bid/ask spread is low for buy and hold investors. I can also say, having actually struck the NAV of mutual funds, that the price distortions around the bid/ask spread also work their way into the accountant's estimate of what a mutual fund's NAV. And there are issues around a fund's daily NAV.

The difference between a ETF's price and a mutual fund's price is that a mutual fund's price is like the difference between making sausages at home and buying sausages in a store. When you make sausages at home or buy a ETF you get to see all of the messy bits. When at the store or buying a mutual fund, it is all sanitized.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by Blender » Sat Jun 22, 2019 3:41 pm

livesoft wrote:
Sat Jun 22, 2019 1:21 pm
That thread shows that things are not always bought and sold at the ask and bid prices. There is order improvement and things can sell between the bid/ask spread even if the spread is only 1 cent. For example, at 150.695 or 150.699.

I do not think the spread is a cost on both sides. One can get the other party to your transaction to pay the spread quite often. The market maker will make money by kickbacks from high-frequency traders and stock exchanges for providing them order flow. Just because somebody says something on bogleheads.org does not make it true.
Fractional price improvements are usually due to automated exchanges (or at least used to be), I'm not sure if the actual level 3 human ones can set fractional cents, they very well may be able to these days. There can be other reasons than just kickbacks too, market makers are traders as well and will usually trade larger orders or even their own books while trying to mask their true intentions and all kinds of games can be played among them, so when a market order comes in to a broker's market maker they will execute it possibly foregoing the spread if it helps the direction they're trying to trade, without having to show their cards to the other makers. This is probably a lot more likely on stocks as opposed to ETFs though.

And I stand corrected, over the course of buying one position and then selling that same position you are actually paying the average of the spread differences between the two transactions, because theoretically the "true" price sans price improvement is in the middle of the bid/ask, so if you look at the spread as a the cost you only pay it once between the two transactions.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by livesoft » Sat Jun 22, 2019 4:30 pm

Blender wrote:
Sat Jun 22, 2019 3:41 pm
And I stand corrected, over the course of buying one position and then selling that same position you are actually paying the average of the spread differences between the two transactions, because theoretically the "true" price sans price improvement is in the middle of the bid/ask, so if you look at the spread as a the cost you only pay it once between the two transactions.
There are some instances at bogleheads.org of investors selling shares in one account and buying them in another account for the same price. Thus, no spread. See, e.g., viewtopic.php?p=1488409#p1488409

I will say that people on this forum with no practical personal experience often repeat what they have read without a critical view, so it borders on hearsay.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by vineviz » Sat Jun 22, 2019 4:42 pm

livesoft wrote:
Sat Jun 22, 2019 4:30 pm
There are some instances at bogleheads.org of investors selling shares in one account and buying them in another account for the same price. Thus, no spread.
There is ALWAYS a spread. And you can NEVER avoid paying it.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by Blender » Sat Jun 22, 2019 4:49 pm

livesoft wrote:
Sat Jun 22, 2019 4:30 pm
Blender wrote:
Sat Jun 22, 2019 3:41 pm
And I stand corrected, over the course of buying one position and then selling that same position you are actually paying the average of the spread differences between the two transactions, because theoretically the "true" price sans price improvement is in the middle of the bid/ask, so if you look at the spread as a the cost you only pay it once between the two transactions.
There are some instances at bogleheads.org of investors selling shares in one account and buying them in another account for the same price. Thus, no spread. See, e.g., viewtopic.php?p=1488409#p1488409

I will say that people on this forum with no practical personal experience often repeat what they have read without a critical view, so it borders on hearsay.
Was that directed towards me? I explicitly excluded price improvements in my statement and don't see where anything I said disagrees with what you stated, I even gave more examples where that supported your example.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by livesoft » Sat Jun 22, 2019 4:51 pm

vineviz wrote:
Sat Jun 22, 2019 4:42 pm
There is ALWAYS a spread. And you can NEVER avoid paying it.
If I place a market order in my Roth IRA to buy 1000 shares of VTI before the market opens and my spouse places a market order in their Roth IRA to sell 1000 shares of VTI before the market opens, then what happens when the market opens?
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by livesoft » Sat Jun 22, 2019 4:52 pm

Blender wrote:
Sat Jun 22, 2019 4:49 pm
Was that directed towards me? I explicitly excluded price improvements in my statement and don't see where anything I said disagrees with what you stated, I even gave more examples where that supported your example.
The last paragraph, no.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by longinvest » Sat Jun 22, 2019 4:58 pm

livesoft wrote:
Sat Jun 22, 2019 1:46 pm
And one more thing while we are on the subject: Limit orders. People here have the false belief that limit orders should always be used. They are just another tool to consider. I will give an example of something I find interesting:

Say bid/ask is 140.10 and 104.11, so one enters an order to buy at 140.10 some shares. The order could languish because no one wants to sell at 140.10, they all want to sell at 104.11, so the limit order just sits there. But if one switches the order to a market order, it could be executed immediately at 140.10 which was the original limit price. How is that possible you ask? I think it is because whoever sold to you at 140.10 got some money from elsewhere as a kickback for order flow or something else.

That is, there is more than meets the eye with any published bid prices and any published ask prices.
Prices can move quickly. I never place market orders because I don't want any bad surprise.

But, I do place marketable limit orders. In other words, in the situation you describe, I would place a buy order with a $140.11 limit. I've often had marketable limit orders execute at better price than the limit.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by jhfenton » Sat Jun 22, 2019 5:16 pm

vineviz wrote:
Sat Jun 22, 2019 1:45 pm
CoastalWinds wrote:
Sat Jun 22, 2019 12:35 pm
Also, do I pay the spread as a buyer but get the benefit of the spread as an eventual seller, or is it a cost to me on both ends?
The spread represents the difference, at a particular point in time, between price you can get if you sell and the price you will pay if you buy. You can and should expect to pay the spread once over the course of holding the investment, but you don't pay it twice.
This is a good definition and summary for folks trying to evaluate the cost of an ETF.
vineviz wrote:
Sat Jun 22, 2019 4:42 pm
livesoft wrote:
Sat Jun 22, 2019 4:30 pm
There are some instances at bogleheads.org of investors selling shares in one account and buying them in another account for the same price. Thus, no spread.
There is ALWAYS a spread. And you can NEVER avoid paying it.
But this is not true. There is no spread at the opening cross/auction or the closing cross/auction. All trades at the opening and closing auctions occur at the same price. I have used the opening cross on a handful of occasions to "swap" ETF shares between accounts without paying a spread by placing overlapping and offsetting pre-market buy and sell limit orders in two accounts. On every occasion, I have received exactly the same price—i.e. the opening price—buying and selling the shares, even though I was not trading the most liquid ETFs in the world. I've done it a few times with VSS/Vanguard FTSE All-World ex-US Small Cap, once with VFVA/Vanguard US Value Factor ETF, and once with EMGF/iShares Emerging Markets Multifactor ETF. The EMGF swap even involved two different brokerage firms. I sold shares at Fidelity in my HSA and bought them at Vanguard in my wife's Roth IRA.

I don't know of a way to participate in the closing auction at Vanguard, but you should be able to at firms that support market or limit on close orders.

Also, there are no guarantees, but when buying—and selling, but I'm almost always buying—small odd lots of Vanguard ETFs, I almost always get mid-spread execution. So if I contribute $500 to my Roth IRA, and I want to buy VFVA trading at $74.00/$74.06, I'll place a market order to buy 8 shares. If the spread doesn't move, I am almost certain to execute at $74.03. (It is closer to 50/50 when I buy small lots of EMGF in my wife's Roth IRA at Vanguard whether I get mid-spread execution.)

In my experience, if I try limit orders with small odd lots, I get poorer execution.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by senex » Sat Jun 22, 2019 5:37 pm

livesoft wrote:
Sat Jun 22, 2019 1:46 pm
And one more thing while we are on the subject: Limit orders. People here have the false belief that limit orders should always be used. They are just another tool to consider. I will give an example of something I find interesting:

Say bid/ask is 140.10 and 104.11, so one enters an order to buy at 140.10 some shares. The order could languish because no one wants to sell at 140.10, they all want to sell at 104.11, so the limit order just sits there. But if one switches the order to a market order, it could be executed immediately at 140.10 which was the original limit price. How is that possible you ask? I think it is because whoever sold to you at 140.10 got some money from elsewhere as a kickback for order flow or something else.
You can accomplish your example with a marketable limit order. A market order is equivalent to a limit order with a limit price of $99,999.99 (if buying) or $0.01 (if selling). The price can vary by exchange, but you get the idea. And maybe your brokerage would limit the buy price to the amount of money in your account, or to their internal notion of a price band, etc.

I submit that a market order provides no benefits over such a limit order, except that clicking "market" is faster than typing a limit price -- which is an important feature for some people.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by senex » Sat Jun 22, 2019 5:41 pm

vineviz wrote:
Sat Jun 22, 2019 4:42 pm
There is ALWAYS a spread. And you can NEVER avoid paying it.
Agree with the first part (assuming we're talking about continuous trading).
Only agree with the second if you're talking about a desire to trade *immediately*, right now.

Otherwise, you can hang a limit order out on your side of the market and it might get filled. The market might be moving through you, but it might not, or maybe it is and you don't care.
Last edited by senex on Sat Jun 22, 2019 5:43 pm, edited 1 time in total.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by HEDGEFUNDIE » Sat Jun 22, 2019 5:42 pm

vineviz wrote:
Sat Jun 22, 2019 4:42 pm
livesoft wrote:
Sat Jun 22, 2019 4:30 pm
There are some instances at bogleheads.org of investors selling shares in one account and buying them in another account for the same price. Thus, no spread.
There is ALWAYS a spread. And you can NEVER avoid paying it.
Not true if the shares are created out of thin air for you by the AP

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by retire2022 » Sat Jun 22, 2019 5:46 pm

CoastalWinds wrote:
Sat Jun 22, 2019 12:35 pm
Hi BHs

At present, I hold only VG mutual funds (MFs), but with the recent divergence of expense ratios (ERs) between Admiral shares and ETFs, I’ve been reading up about the differences between MF and ETFs (relative pros/cons).

I feel like ETFs fit my needs equally well while offering the long-term benefit of lower ERs. Over long periods of time with large sums invested, I don’t believe the cost difference is trivial. Specifically, I’m referring to Total Stock Mkt (VTSAX = 0.04% vs VTI = 0.03%), and Total Intl Stock (VTIAX = 0.11% vs VXUS = 0.09%).

But there is one aspect of ETFs that I seem to be unable to wrap my head around, that being the bid-ask spread. I’ve read about this but am struggling to understand its implications in practical terms. I would say this has been the sole reason I have not started investing in ETFs (per the mantra “only invest in what you understand”). I feel like the Wiki could use some improvement in this area, but I digress.

From what I’ve read (but please correct me if I’m wrong), it is essentially a cost on both the buy side and sell side. I’ve also read that the cost is not consistent over time: sometimes the spread is large / unfavorable, while other times it is small. But I don’t have a context for what is a reasonable spread with which to buy (by BH standards) vs when it is too large and I should wait.

Also, do I pay the spread as a buyer but get the benefit of the spread as an eventual seller, or is it a cost to me on both ends?

Is there some practical guidance (“do this”, “do not do this”, “look for this”, lessons learned the hard way, etc.) that folks can share with me that might give me the confidence to start purchasing ETFs?

Thank you in advance for sharing.

CW
Op

I recently did this check out my discussion on VGT so far on paper I made 11K on paper at one point, catching a falling knife is what I did

viewtopic.php?f=1&t=280668&sid=4f632c1a ... b#p4575776

No different than a bid on ebay or auction except you figure out your entry point

using Simple Moving Average, above 20 day moving average at all time high you sell, below 20 day moving average you buy and breaking a 200 day moving average one should consider entry point

https://www.youtube.com/watch?v=ktToRNp ... e=youtu.be

most BHer's would shun this process, but I've been doing this before BH board.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by senex » Sat Jun 22, 2019 6:05 pm

CoastalWinds wrote:
Sat Jun 22, 2019 12:35 pm
Also, do I pay the spread as a buyer but get the benefit of the spread as an eventual seller, or is it a cost to me on both ends?

Is there some practical guidance (“do this”, “do not do this”, “look for this”, lessons learned the hard way, etc.) that folks can share with me that might give me the confidence to start purchasing ETFs?
Great question. You may see the thread devolve a bit into sectarian wars due to the nature of the question.

As a practical matter, the practical things already mentioned are good. In particular, for most big etfs, the spread is so small that you can safely ignore it as a long term investor. If you really care, the time-of-day point is good (generally 10-3:30 has the most liquidity). You could also use midpoint peg orders if your broker allows it. Auction orders would avoid formally paying a spread, but there are some boglehead threads about poor execution quality at the close (closing prices diverging from nav).

Regarding the sectarian wars, it's due to the inherent conceptual ambiguity of "spread."

A trade occurs at a price (one real number). You're trying to figure out to what extent that price was fair/favorable to you. There is no canonical way to do that.

You could compare it to the last trade before yours, the next trade after yours, the first auction of the day (the open), the last auction of the day (the close), the weighted average trade price throughout the day, the current publicly-listed-but-not-yet-executed offers to buy and sell (bbo), the bbo the moment before you placed your order, the bbo when your order arrived at your broker, the bbo when your order hit the first exchange, the bbo shortly after your order executed, the bbo in some window before and after your execution, etc. All are reasonable choices and all can differ, though they are typically pretty close for liquid products. I personally think the bid-ask spread can be useful, but is poor as a single measure of execution quality. As a long-term retail investor, I'm more concerned about my long term average fill prices compared to nav in some window around my trading time (even that is potentially controversial, because nav could be computed by mid prices, last trade prices, etc).

Anyway -- lucky you, you get to trade in the most liquid, efficient market in the history of the world. I personally can't imagine how retail micro-managing of execution quality would substantially change results compared to just placing marketable orders (with the usual caveats about broadly-held etfs, during the trading day, on typical days, etc; some etfs DO maintain large spreads and large nav divergences, so always do your research).

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by livesoft » Sat Jun 22, 2019 6:29 pm

senex wrote:
Sat Jun 22, 2019 6:05 pm
... just placing marketable orders (with the usual caveats about broadly-held etfs, during the trading day, on typical days, etc; some etfs DO maintain large spreads and large nav divergences, so always do your research).
Nice comments which I mostly agree with. But not all submitted marketable limit orders will get executed in all cases. For instance, suppose bid is 140.50 and ask is 140.70, so you place a limit order to buy at 140.70 which I understand is a marketable limit order. So the program that is asking for 140.70 sees your order before it gets published and removes its offer to buy at 140.70 and changes it to 140.80. The means your marketable limit order is no longer a marketable limit order. Your order becomes temporarily the best bid price and you see bid/ask of 140.70/140.80 after you click the submit button for your order.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by senex » Sat Jun 22, 2019 6:29 pm

Blender wrote:
Sat Jun 22, 2019 3:41 pm
Fractional price improvements are usually due to automated exchanges (or at least used to be), I'm not sure if the actual level 3 human ones can set fractional cents, they very well may be able to these days. There can be other reasons than just kickbacks too, market makers are traders as well and will usually trade larger orders or even their own books while trying to mask their true intentions and all kinds of games can be played among them, so when a market order comes in to a broker's market maker they will execute it possibly foregoing the spread if it helps the direction they're trying to trade, without having to show their cards to the other makers. This is probably a lot more likely on stocks as opposed to ETFs though.
Generally speaking, Reg NMS requires public quotations to be in whole cents, and most orders must be priced in whole cents. Exceptions exist for sub-$1 stocks and for orders interacting with retail order flow, which are allowed to provide subpenny price improvement to retail customers. Also, derivatively-priced trades (midpoint pegs, pre-arranged vwap trades, etc) may execute at subpenny prices.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by senex » Sat Jun 22, 2019 6:43 pm

livesoft wrote:
Sat Jun 22, 2019 6:29 pm
Nice comments which I mostly agree with. But not all submitted marketable limit orders will get executed in all cases. For instance, suppose bid is 140.50 and ask is 140.70, so you place a limit order to buy at 140.70 which I understand is a marketable limit order. So the program that is asking for 140.70 sees your order before it gets published and removes its offer to buy at 140.70 and changes it to 140.80. The means your marketable limit order is no longer a marketable limit order. Your order becomes temporarily the best bid price and you see bid/ask of 140.70/140.80 after you click the submit button for your order.
Yes, agree. The closer your limit price to the best-available price, the more likely it is to occur. It can happen simply based on timing or on micro-structure games.

I suspect that's why people avoid marketable limit orders -- because it's hard to estimate the likelihood & severity of a no-fill against the likelihood & severity of overpaying in a "market dislocation" scenario. That tradeoff is hard to contemplate, so they just say "screw it, I'll pay anything, just make it happen for me" -- and they rely on the extremely well-functioning US markets (and regulations) to provide a reasonable result -- which they usually do.

I price my limit orders about 1% through the market -- the amount I'm willing to "chase" for immediate execution. In the common case it captures all the price-improvement and queue-jumping opportunities you have described. In the uncommon case -- if the market moves away from me by more than 1% -- I prefer to get the cancel, pause, take a breath, and re-think what is happening with my trading & world markets. Cheers.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by vineviz » Sat Jun 22, 2019 7:47 pm

livesoft wrote:
Sat Jun 22, 2019 6:29 pm
For instance, suppose bid is 140.50 and ask is 140.70, so you place a limit order to buy at 140.70 which I understand is a marketable limit order. So the program that is asking for 140.70 sees your order before it gets published and removes its offer to buy at 140.70 and changes it to 140.80.
The market might very well move away from your limit order, but it won't be because someone "saw" your order and changed their offer before your order could be filled.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by vineviz » Sat Jun 22, 2019 7:49 pm

HEDGEFUNDIE wrote:
Sat Jun 22, 2019 5:42 pm
vineviz wrote:
Sat Jun 22, 2019 4:42 pm
livesoft wrote:
Sat Jun 22, 2019 4:30 pm
There are some instances at bogleheads.org of investors selling shares in one account and buying them in another account for the same price. Thus, no spread.
There is ALWAYS a spread. And you can NEVER avoid paying it.
Not true if the shares are created out of thin air for you by the AP
On the contrary, the spread is how the AP gets paid for creating the units. No spread = no creation/redemption.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by alex_686 » Sat Jun 22, 2019 8:29 pm

HEDGEFUNDIE wrote:
Sat Jun 22, 2019 5:42 pm
vineviz wrote:
Sat Jun 22, 2019 4:42 pm
livesoft wrote:
Sat Jun 22, 2019 4:30 pm
There are some instances at bogleheads.org of investors selling shares in one account and buying them in another account for the same price. Thus, no spread.
There is ALWAYS a spread. And you can NEVER avoid paying it.
Not true if the shares are created out of thin air for you by the AP
While there is always a spread, you can avoid paying it. It is called "passive trading", which is the inverse of "information trading". You put in your limit order and you hope the market moves towards you. If it does, great. If not - and this is the downside - your trade does not get executed and you have to pick a new price for your limit order. The chance your trades does not get executed is a cost, but this takes us down the VWAP rabbit hole, and how you measure the costs of trading - both explicit and implicit. This trading technique is often used by index funds.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by senex » Sat Jun 22, 2019 8:34 pm

vineviz wrote:
Sat Jun 22, 2019 7:49 pm
On the contrary, the spread is how the AP gets paid for creating the units. No spread = no creation/redemption.
Both sentences are wrong, but in different ways.

The first sentence is fine if you say the spread is *one* of the ways the AP gets paid (I would guess the primary way for very liquid etfs?). But an AP that only removes liquidity (always pays the spread) can create units and make a profit. Sometimes the price dislocations are that big. In fact, some of the best days are when you're removing like crazy due to other participants being mispriced.

The second sentence is tautological to the point of being useless. Yes, strictly speaking, no spread means there are no resting orders, which means no trades can occur (if we ignore auctions for the moment). But the point you're implying -- that the size of of the spread is the only source of profit to APs -- is incorrect. c/r activity could still continue profitably if all spreads were arbitrarily small, due to arbitrage-able price discrepancies between assets.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by vineviz » Sat Jun 22, 2019 9:09 pm

senex wrote:
Sat Jun 22, 2019 8:34 pm
The first sentence is fine if you say the spread is *one* of the ways the AP gets paid (I would guess the primary way for very liquid etfs?).
Yes, I meant to write something more generalized and got carried away a little bit.

senex wrote:
Sat Jun 22, 2019 8:34 pm
The second sentence is tautological to the point of being useless.
You'd think so, but there seem to be a lot of people who think that they can somehow avoid the spread or get someone else to bear it.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by vineviz » Sat Jun 22, 2019 9:12 pm

alex_686 wrote:
Sat Jun 22, 2019 8:29 pm
You put in your limit order and you hope the market moves towards you.
Selling liquidity in this way can be a profitable strategy, possibly, but I wouldn't categorize it as avoiding the bid/ask spread.

Yes, the market MIGHT move toward you. Or the bid/ask spread MIGHT narrow while your limit order is outstanding. But neither situation is one that genuinely avoids there being a spread in the market at the time of your execution.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by alex_686 » Sat Jun 22, 2019 9:22 pm

vineviz wrote:
Sat Jun 22, 2019 9:12 pm
alex_686 wrote:
Sat Jun 22, 2019 8:29 pm
You put in your limit order and you hope the market moves towards you.
Selling liquidity in this way can be a profitable strategy, possibly, but I wouldn't categorize it as avoiding the bid/ask spread.

Yes, the market MIGHT move toward you. Or the bid/ask spread MIGHT narrow while your limit order is outstanding. But neither situation is one that genuinely avoids there being a spread in the market at the time of your execution.
Maybe exploiting the bid/ask spread would be better phrasing? "Selling liquidity" also hits it square on the head.

But I think we are on the same wavelength here. There is a cost to buying and selling, there is no way around it. Not via selling liquidity or buying and selling mutual funds at the NAV,.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by SweetAeromotion » Sat Jun 22, 2019 9:27 pm

-Look for funds that have large volumes of trades. Vanguard's VTI and VXUS quite easily meet this criteria as they trade in volumes north of 1 million shares per day. Your trade will likely be done before the screen even loads to verify your trade at those volumes.

-Spreads of .01 of bid to ask are a good indicator of the above - The larger the price of the ETF, the smaller the % the spread of 1 cent/share is. This is useful if one likes to view the spread as a "commission" or cost of sorts.

-Ideally trade when the underlying market is open as opposed to when it is closed. After/before market trades widen spreads because volumes are lower and other market forces that are above my pay grade/understanding to explain.

-I use limit orders and trade away from the open and close of the markets of the funds I am trading as some of the underlying funds are not yet "awake" at the open and occasionally large institutional trades occur in the last hour that swing prices rapidly - remember you are trading in real time with ETFs. If the Fed chair is going to speak, you might not want to trade during that time... unless you are an adrenaline junkie. :)

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by typical.investor » Sat Jun 22, 2019 9:29 pm

vineviz wrote:
Sat Jun 22, 2019 9:12 pm
alex_686 wrote:
Sat Jun 22, 2019 8:29 pm
You put in your limit order and you hope the market moves towards you.
Selling liquidity in this way can be a profitable strategy, possibly, but I wouldn't categorize it as avoiding the bid/ask spread.

Yes, the market MIGHT move toward you. Or the bid/ask spread MIGHT narrow while your limit order is outstanding. But neither situation is one that genuinely avoids there being a spread in the market at the time of your execution.
Yeah, that is not definitely not a strategy to really avoid the spread. Ok, you avoid the spread sometimes at the expense of having to pay a worse price sometimes. And then there is your time if the order keeps not going through.

A marketable limit order is the way to go. You get the market price at that time and avoid any glitches that have caused short term price fluctuation. It's easy. It's reliable.

No one should feel like that they have a sub-optimal trading strategy if they are not actively trying to avoid "paying the spread". It's just like picking individual stocks. People will tout their skills by showing the times that work and ignore the times that don't.

Just go for the best price at that time via a marketable limit order.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by Tdubs » Sat Jun 22, 2019 9:40 pm

FIREchief wrote:
Sat Jun 22, 2019 1:53 pm
livesoft wrote:
Sat Jun 22, 2019 1:50 pm
Also I find that in the last minute of the market some folks get frustrated that their limit orders haven't executed, so they drop their pants. The dropping of pants is a way that the bid/ask spread is narrowed.
:D Is that an actual insider term??
I don't think we got an answer to this important question.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by FIREchief » Sat Jun 22, 2019 9:53 pm

typical.investor wrote:
Sat Jun 22, 2019 9:29 pm
A marketable limit order is the way to go. You get the market price at that time and avoid any glitches that have caused short term price fluctuation. It's easy. It's reliable.

No one should feel like that they have a sub-optimal trading strategy if they are not actively trying to avoid "paying the spread". It's just like picking individual stocks. People will tout their skills by showing the times that work and ignore the times that don't.

Just go for the best price at that time via a marketable limit order.
I readily admitted earlier that I know very little in this realm (and I can prove it! :P ). Is a marketable limit order just a limit order to buy at the current ask price?
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by FIREchief » Sat Jun 22, 2019 9:54 pm

Tdubs wrote:
Sat Jun 22, 2019 9:40 pm
FIREchief wrote:
Sat Jun 22, 2019 1:53 pm
livesoft wrote:
Sat Jun 22, 2019 1:50 pm
Also I find that in the last minute of the market some folks get frustrated that their limit orders haven't executed, so they drop their pants. The dropping of pants is a way that the bid/ask spread is narrowed.
:D Is that an actual insider term??
I don't think we got an answer to this important question.
No, we didn't, and I suspect it is because the insiders don't want the rest of us to REALLY know what goes on... :shock:
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by Tdubs » Sat Jun 22, 2019 10:11 pm

FIREchief wrote:
Sat Jun 22, 2019 9:54 pm
Tdubs wrote:
Sat Jun 22, 2019 9:40 pm
FIREchief wrote:
Sat Jun 22, 2019 1:53 pm
livesoft wrote:
Sat Jun 22, 2019 1:50 pm
Also I find that in the last minute of the market some folks get frustrated that their limit orders haven't executed, so they drop their pants. The dropping of pants is a way that the bid/ask spread is narrowed.
:D Is that an actual insider term??
I don't think we got an answer to this important question.
No, we didn't, and I suspect it is because the insiders don't want the rest of us to REALLY know what goes on... :shock:
It appears to be a common term in sales.

https://blog.simplesalestracking.com/20 ... -on-price/

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by typical.investor » Sat Jun 22, 2019 10:54 pm

FIREchief wrote:
Sat Jun 22, 2019 9:53 pm
typical.investor wrote:
Sat Jun 22, 2019 9:29 pm
A marketable limit order is the way to go. You get the market price at that time and avoid any glitches that have caused short term price fluctuation. It's easy. It's reliable.

No one should feel like that they have a sub-optimal trading strategy if they are not actively trying to avoid "paying the spread". It's just like picking individual stocks. People will tout their skills by showing the times that work and ignore the times that don't.

Just go for the best price at that time via a marketable limit order.
I readily admitted earlier that I know very little in this realm (and I can prove it! :P ). Is a marketable limit order just a limit order to buy at the current ask price?
A marketable limit order is one that has a limit but is very likely to be executed*.

An order to buy at the current ask might execute or it might not. It depends which way the market is moving. I don't place a limit order at the ask because too many times it doesn't get executed and I have to replace the order higher.

So say bid/ask 104.10 and 104.13. If you want to buy, a marketable limit order would be something like 104.14 or maybe 104.15 depending on how much you think the market might move. As noted by livesoft when using market orders, the actual price you pay may be 104.105 or it may be 104.11 or it maybe 104.125 or it could be 104.135. You will get the best price in the market that your broker can get at the time.

The only difference between a marketable limit order and a market order, is the rare cases that there is a glitch in the system. If the price suddenly fluctuates for a few seconds to 128, your order won't go through with a marketable limit order, but it would with a market order.

* of course this depends on how much wiggle room you place your order at. Even placing at 104.17 won't really hurt you because your broker will get the best price available. And if the price has gone up to 104.16, I bet it's not going down anytime soon you so are going to have to place an order at that price anyway. And the ask then will likely be 104.18. [In other words, if you'd placed at 104.13 when the spread was 104.10 and 104.13 and it didn't fill, you'd be looking at replacing the order again with something like a 104.15 104.18 bid/spread].

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by typical.investor » Sat Jun 22, 2019 10:57 pm

livesoft wrote:
Sat Jun 22, 2019 2:16 pm
Here's one for you: Suppose the bid/ask for VTI is $150.70 / $150.71. Further suppose you submit an order to buy 4 shares of VTI at $150.70, but I submit a market order to buy 4 shares. My broker gives me a price of $150.701, so my order gets executed before your order. How much did I actually pay for my 4 shares? Answer: I actually paid $150.70 because of rounding off to the nearest cent. That is, I scooped you (my order got ahead of yours) because 4 x $150.701 = $602.804 which is $602.80 to the nearest cent.
A marketable limit order of $150.72 would be the same as a market order in that case.

However, if there was a glitch where the price spiked momentarily to $163.75, your market order would fill but the marketable limit order wouldn't. Sure it doesn't happen much, but it has.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by typical.investor » Sat Jun 22, 2019 11:12 pm

livesoft wrote:
Sat Jun 22, 2019 1:46 pm
And one more thing while we are on the subject: Limit orders. People here have the false belief that limit orders should always be used. They are just another tool to consider. I will give an example of something I find interesting:
This example makes no sense to me whatsoever and is just confusion I think.
livesoft wrote:
Sat Jun 22, 2019 1:46 pm
Say bid/ask is 140.10 and 104.11, so one enters an order to buy at 140.10 some shares. The order could languish because no one wants to sell at 140.10, they all want to sell at 104.11, so the limit order just sits there.
Why would anyone not want to sell at 140.10? Why would anyone want to sell at 104.11?
livesoft wrote:
Sat Jun 22, 2019 1:46 pm
But if one switches the order to a market order, it could be executed immediately at 140.10 which was the original limit price. How is that possible you ask? I think it is because whoever sold to you at 140.10 got some money from elsewhere as a kickback for order flow or something else.
I suspect that bid of 140.10 will be gone before your order is processed. If the bid were really that much higher than the ask, I think it's a pretty clear indication that prices are goofy. Maybe the bids were increasing because orders weren't being filled due to a system error.

In that case, a marketable limit order is your best strategy. I'd look at last order and maybe recent price. If the last order was 104.10 and that's where the price has been around recently, there is no way I'd place a market order. I wouldn't want to get caught with orders suddenly resuming. I would bet that someone would be wise to what's happening and put in a sell order with a limit of 140.00 just to catch the market orders when trading resumes.

If the bid/ask in this example was really meant to be written as 104.10 and 104.11, then again a marketable limit order of 104.12 or 104.13 would be your best approach. You may still get a price of 104.105 if it is available, and your order will still get filled if the ask moves to 104.115 and would represent the best price at the time. If there were a glitch and the ask spiked to 140, then you would be protected by not having a fill (that a market order would have given you).
Last edited by typical.investor on Sun Jun 23, 2019 1:18 am, edited 1 time in total.

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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by FIREchief » Sun Jun 23, 2019 1:06 am

typical.investor wrote:
Sat Jun 22, 2019 10:54 pm
FIREchief wrote:
Sat Jun 22, 2019 9:53 pm
typical.investor wrote:
Sat Jun 22, 2019 9:29 pm
A marketable limit order is the way to go. You get the market price at that time and avoid any glitches that have caused short term price fluctuation. It's easy. It's reliable.

No one should feel like that they have a sub-optimal trading strategy if they are not actively trying to avoid "paying the spread". It's just like picking individual stocks. People will tout their skills by showing the times that work and ignore the times that don't.

Just go for the best price at that time via a marketable limit order.
I readily admitted earlier that I know very little in this realm (and I can prove it! :P ). Is a marketable limit order just a limit order to buy at the current ask price?
A marketable limit order is one that has a limit but is very likely to be executed*.

An order to buy at the current ask might execute or it might not. It depends which way the market is moving. I don't place a limit order at the ask because too many times it doesn't get executed and I have to replace the order higher.

So say bid/ask 104.10 and 104.13. If you want to buy, a marketable limit order would be something like 104.14 or maybe 104.15 depending on how much you think the market might move. As noted by livesoft when using market orders, the actual price you pay may be 104.105 or it may be 104.11 or it maybe 104.125 or it could be 104.135. You will get the best price in the market that your broker can get at the time.

The only difference between a marketable limit order and a market order, is the rare cases that there is a glitch in the system. If the price suddenly fluctuates for a few seconds to 128, your order won't go through with a marketable limit order, but it would with a market order.

* of course this depends on how much wiggle room you place your order at. Even placing at 104.17 won't really hurt you because your broker will get the best price available. And if the price has gone up to 104.16, I bet it's not going down anytime soon you so are going to have to place an order at that price anyway. And the ask then will likely be 104.18. [In other words, if you'd placed at 104.13 when the spread was 104.10 and 104.13 and it didn't fill, you'd be looking at replacing the order again with something like a 104.15 104.18 bid/spread].
Thanks for the explanation. That is pretty much how I understood it. :beer
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by FIREchief » Sun Jun 23, 2019 1:07 am

Tdubs wrote:
Sat Jun 22, 2019 10:11 pm
FIREchief wrote:
Sat Jun 22, 2019 9:54 pm
Tdubs wrote:
Sat Jun 22, 2019 9:40 pm
FIREchief wrote:
Sat Jun 22, 2019 1:53 pm
livesoft wrote:
Sat Jun 22, 2019 1:50 pm
Also I find that in the last minute of the market some folks get frustrated that their limit orders haven't executed, so they drop their pants. The dropping of pants is a way that the bid/ask spread is narrowed.
:D Is that an actual insider term??
I don't think we got an answer to this important question.
No, we didn't, and I suspect it is because the insiders don't want the rest of us to REALLY know what goes on... :shock:
It appears to be a common term in sales.

https://blog.simplesalestracking.com/20 ... -on-price/
The only place the word "pants" appears in that article is in the title. I would still like to hear from the insider experts. :P
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by samsoes » Sun Jun 23, 2019 12:11 pm

FIREchief wrote:
Sat Jun 22, 2019 1:53 pm
livesoft wrote:
Sat Jun 22, 2019 1:50 pm
Also I find that in the last minute of the market some folks get frustrated that their limit orders haven't executed, so they drop their pants. The dropping of pants is a way that the bid/ask spread is narrowed.
:D Is that an actual insider term??
I've been in the business for the better part of 31 years at two major exchanges. I have designed and coded price-improving buy/sell matching algorithms, etc., and I assure you, I've never heard of this expression.
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by grabiner » Sun Jun 23, 2019 3:34 pm

jhfenton wrote:
Sat Jun 22, 2019 5:16 pm
vineviz wrote:
Sat Jun 22, 2019 4:42 pm
livesoft wrote:
Sat Jun 22, 2019 4:30 pm
There are some instances at bogleheads.org of investors selling shares in one account and buying them in another account for the same price. Thus, no spread.
There is ALWAYS a spread. And you can NEVER avoid paying it.
But this is not true. There is no spread at the opening cross/auction or the closing cross/auction. All trades at the opening and closing auctions occur at the same price. I have used the opening cross on a handful of occasions to "swap" ETF shares between accounts without paying a spread by placing overlapping and offsetting pre-market buy and sell limit orders in two accounts.
This is safe for the matched buy and sell trades you were making, but not absolutely safe for single trades. The opening cross price is set at the price which allows the largest number of shares to be traded. In a low-volume ETF, if you add another buy order to the trades at the market open, you may raise the cross price.

In particular, it sometimes happens that low-volume ETFs have no trades at the open; I have seen this when trading VSS (Vanguard FTSE All-World Ex-US Small-Cap). If the highest buy order is $99.00 and the lowest sell order is $100.00, then a market order to buy at the open will create an opening cross at $100.00, and a market order to sell will create an opening cross at $99.00. If you don't place an order at the open, the market will open with a bid of $99.00 and an ask of $100.00, and a market order to buy or sell will be affected by the same $1 spread.

When this happens, I usually just wait until the spread gets down to a more normal value of 0.1% or less. Meanwhile, I have watched a few impatient traders eat the large spread. Here is my experience from 2014: Still need to use limit orders
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livesoft
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Re: Seeking practical help understanding “bid-ask spread” for ETFs

Post by livesoft » Sun Jun 23, 2019 3:38 pm

This should probably go in the case study thread, but I think some might find it an amusing anecdote for this thread.

I received a dividend in my Roth IRA the other day. I wanted to invest it in a timely manner and not leave a cash turd in the account. The account already held VSS, the dividend in the account was $1044.76. VSS was trading at $104.58 a share.

Can you guess what I did?
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