Bid-ask Spread tips for a first time EFT buyer?

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JustinR
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Bid-ask Spread tips for a first time EFT buyer?

Post by JustinR » Tue Jan 24, 2017 11:00 pm

Signed up for commission-free ETFs on Ameritrade.

I plan on buying all VGIT (Vanguard Intermediate-Term Government Bond ETF)

I've never "day traded" before so all of this is confusing to me. According to Vanguard, I should set a limit order at slighly above the lowest ask? Is that right?

toto238
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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by toto238 » Tue Jan 24, 2017 11:11 pm

It depends on volume. Are you planning on buying 100 shares or 100,000 shares? How you should trade depends heavily on how much you're trading.

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by JustinR » Tue Jan 24, 2017 11:16 pm

toto238 wrote:It depends on volume. Are you planning on buying 100 shares or 100,000 shares? How you should trade depends heavily on how much you're trading.

$1,000 worth of VGIT (currently ~$65).

So 15 shares? Sometimes I'll only buy half that though.

Also, can you buy fractional shares in ETFs?

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by grabiner » Tue Jan 24, 2017 11:36 pm

You can't buy fractional shares.

And for such a small lot, you might as well place a limit order at the ask, as long as the spread is relatively small; there isn't much to be saved. Vanguard says that VGIT normally trades at a 6-cent spread, so buying 15 shares at double the normal spread will cost you only an extra 90 cents.

It's more important to watch spreads carefully if you are making large trades. In a trade for 500 shares, saving 10 cents on the spread is a difference of $50, so it is worth waiting for a spread to narrow.
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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by JustinR » Wed Jan 25, 2017 12:10 am

grabiner wrote:You can't buy fractional shares.

And for such a small lot, you might as well place a limit order at the ask, as long as the spread is relatively small; there isn't much to be saved. Vanguard says that VGIT normally trades at a 6-cent spread, so buying 15 shares at double the normal spread will cost you only an extra 90 cents.

It's more important to watch spreads carefully if you are making large trades. In a trade for 500 shares, saving 10 cents on the spread is a difference of $50, so it is worth waiting for a spread to narrow.

Sounds simple enough. Where does VG tell you the average spread?

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by mcraepat9 » Wed Jan 25, 2017 12:16 am

JustinR wrote:
grabiner wrote:You can't buy fractional shares.

And for such a small lot, you might as well place a limit order at the ask, as long as the spread is relatively small; there isn't much to be saved. Vanguard says that VGIT normally trades at a 6-cent spread, so buying 15 shares at double the normal spread will cost you only an extra 90 cents.

It's more important to watch spreads carefully if you are making large trades. In a trade for 500 shares, saving 10 cents on the spread is a difference of $50, so it is worth waiting for a spread to narrow.

Sounds simple enough. Where does VG tell you the average spread?


https://advisors.vanguard.com/VGApp/iip ... daskspread
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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by livesoft » Wed Jan 25, 2017 6:38 am

I don't think setting a limit order with a limit price at the ask price is the thing to do for such small orders. But you can experiment and see what happens. Since you get free trades, you can submit more than one order.

I think that if you submit a limit order for 15 (or 10 or 5) shares at the current ask price, that you will pay the current ask price and the full spread.

But if you submit a market order for 15 (or 10 or 5) shares then your order probably will execute at a price point about halfway between the bid and ask prices, but you would pay no higher than the current ask anyways.

If you submit a limit order at the bid, then your order may not execute right away, but that would not be a problem either.

So submit 3 orders of 5 shares each and tell us what happens. But wait until the bid and ask prices are close together, say 5 cents or less.

If you were trying to buy 500 shares, then I think that's a slightly different scenario.
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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by fundseeker » Wed Jan 25, 2017 7:03 am

JustinR wrote:I plan on buying all VGIT (Vanguard Intermediate-Term Government Bond ETF)

I've never "day traded" before so all of this is confusing to me. According to Vanguard, I should set a limit order at slighly above the lowest ask? Is that right?


Why buy ETFs at all, especially when it is more complicated than just buying the fund? Maybe one day I will see some benefit to ETFs. Good luck.

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by livesoft » Wed Jan 25, 2017 7:24 am

And don't forget that you can change your order after it was submitted if it hasn't executed. For instance, suppose you submit a limit order to buy that is one cent below the bid price. Your order may become the new bid price as others change their orders. If your order does not execute in the time you want it to, then you can change it. Or if you submit a market order and it executes below the current ask price, then why would you bother to submit another order that is a limit order at the ask price or slightly above it?
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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by zwzhang » Wed Jan 25, 2017 9:28 am

For such a small amount, suggest you to consider using an index mutual fund instead.

If the commission is $6.95 per transaction, and the spread is $0.03, the total cost of trade will be: (15 shares x $0.03) + $6.95 = $7.40. That will be about 0.74% of your $1000. Too high a cost to pay.

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by livesoft » Wed Jan 25, 2017 9:32 am

There is no commission. If a US investor is paying brokerage commissions, then they should switch brokers. Pure and simple.
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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by Sailor36 » Wed Jan 25, 2017 9:38 am

zwzhang wrote:For such a small amount, suggest you to consider using an index mutual fund instead.

If the commission is $6.95 per transaction, and the spread is $0.03, the total cost of trade will be: (15 shares x $0.03) + $6.95 = $7.40. That will be about 0.74% of your $1000. Too high a cost to pay.


But unless you already own the index fund, you have to buy at least $10,000 worth to get the Admiral shares at the same expense ratio as the ETF, or $3,000 for the Investor shares.
Last edited by Sailor36 on Wed Jan 25, 2017 10:04 am, edited 1 time in total.

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by zwzhang » Wed Jan 25, 2017 9:56 am

livesoft wrote:There is no commission. If a US investor is paying brokerage commissions, then they should switch brokers. Pure and simple.


Wow! this will never happen in Canada, at least for a US listed ETF. :shock:

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by JustinR » Wed Jan 25, 2017 10:28 pm

livesoft wrote:I don't think setting a limit order with a limit price at the ask price is the thing to do for such small orders. But you can experiment and see what happens. Since you get free trades, you can submit more than one order.

I think that if you submit a limit order for 15 (or 10 or 5) shares at the current ask price, that you will pay the current ask price and the full spread.

But if you submit a market order for 15 (or 10 or 5) shares then your order probably will execute at a price point about halfway between the bid and ask prices, but you would pay no higher than the current ask anyways.

If you submit a limit order at the bid, then your order may not execute right away, but that would not be a problem either.

So submit 3 orders of 5 shares each and tell us what happens. But wait until the bid and ask prices are close together, say 5 cents or less.

If you were trying to buy 500 shares, then I think that's a slightly different scenario.

livesoft wrote:And don't forget that you can change your order after it was submitted if it hasn't executed. For instance, suppose you submit a limit order to buy that is one cent below the bid price. Your order may become the new bid price as others change their orders. If your order does not execute in the time you want it to, then you can change it. Or if you submit a market order and it executes below the current ask price, then why would you bother to submit another order that is a limit order at the ask price or slightly above it?


I'm confused. Isn't a market order one that buys immediately at the current ask price?


fundseeker wrote:Why buy ETFs at all, especially when it is more complicated than just buying the fund? Maybe one day I will see some benefit to ETFs. Good luck.

zwzhang wrote:For such a small amount, suggest you to consider using an index mutual fund instead.

If the commission is $6.95 per transaction, and the spread is $0.03, the total cost of trade will be: (15 shares x $0.03) + $6.95 = $7.40. That will be about 0.74% of your $1000. Too high a cost to pay.

TD Ameritrade (my brokerage) charges $25 per transaction for no-load mutual funds. I have access to commission-free ETFs so using those instead. See the fee schedule: https://www.tdameritrade.com/retail-en_ ... PS1009.pdf

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by grabiner » Wed Jan 25, 2017 10:43 pm

JustinR wrote:
livesoft wrote:I don't think setting a limit order with a limit price at the ask price is the thing to do for such small orders. But you can experiment and see what happens. Since you get free trades, you can submit more than one order.

I think that if you submit a limit order for 15 (or 10 or 5) shares at the current ask price, that you will pay the current ask price and the full spread.

But if you submit a market order for 15 (or 10 or 5) shares then your order probably will execute at a price point about halfway between the bid and ask prices, but you would pay no higher than the current ask anyways.

If you submit a limit order at the bid, then your order may not execute right away, but that would not be a problem either.

So submit 3 orders of 5 shares each and tell us what happens. But wait until the bid and ask prices are close together, say 5 cents or less.

If you were trying to buy 500 shares, then I think that's a slightly different scenario.


I'm confused. Isn't a market order one that buys immediately at the current ask price?


A market order always buys at the best available price; a limit order buys at the best available price as long as the price is no higher than the limit. Either one will execute immediately if there is a matching offer. A limit order at the ask price might not execute if the order at the ask went away before your order posted.

It will often happen that you get a better price than the ask, on either a market or limit order. Someone might step in and accept your order at a lower price, or there could be a non-displayed order. For example, orders for less than 100 shares are not reported in the bid and ask. If the ask is $20.02, and I am offering to sell 50 shares at $20.00, your market order or limit order at $20.02 will pick up my 50 shares first, and then buy shares at $20.02 if you are buying more than 50.
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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by JustinR » Wed Jan 25, 2017 10:49 pm

grabiner wrote:
JustinR wrote:
livesoft wrote:I don't think setting a limit order with a limit price at the ask price is the thing to do for such small orders. But you can experiment and see what happens. Since you get free trades, you can submit more than one order.

I think that if you submit a limit order for 15 (or 10 or 5) shares at the current ask price, that you will pay the current ask price and the full spread.

But if you submit a market order for 15 (or 10 or 5) shares then your order probably will execute at a price point about halfway between the bid and ask prices, but you would pay no higher than the current ask anyways.

If you submit a limit order at the bid, then your order may not execute right away, but that would not be a problem either.

So submit 3 orders of 5 shares each and tell us what happens. But wait until the bid and ask prices are close together, say 5 cents or less.

If you were trying to buy 500 shares, then I think that's a slightly different scenario.


I'm confused. Isn't a market order one that buys immediately at the current ask price?


A market order always buys at the best available price; a limit order buys at the best available price as long as the price is no higher than the limit. Either one will execute immediately if there is a matching offer. A limit order at the ask price might not execute if the order at the ask went away before your order posted.

It will often happen that you get a better price than the ask, on either a market or limit order. Someone might step in and accept your order at a lower price, or there could be a non-displayed order. For example, orders for less than 100 shares are not reported in the bid and ask. If the ask is $20.02, and I am offering to sell 50 shares at $20.00, your market order or limit order at $20.02 will pick up my 50 shares first, and then buy shares at $20.02 if you are buying more than 50.

What?? I had no idea about that. That's what I'm missing. So there may actually be lots of smaller bids and asks in between the actual bid/ask price?

Also, if this is the case, couldn't I just buy 1 market order share at a time, checking each time to see that its price doesn't go above the ask? That way I'm guaranteed to get all the cheapest shares available right?

Also, are limit orders "hidden", or are they displayed? So if the current bid is $50, and I put in a limit order at $55 for over 100 shares, does the bid move up to $55?

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by TOJ » Wed Jan 25, 2017 11:00 pm

Why are you using TD Ameritrade? Genuine curiosity. $25 to buy mutual funds is hilarious, but maybe you have some circumstance that I am unaware of.

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by JustinR » Wed Jan 25, 2017 11:03 pm

TOJ wrote:Why are you using TD Ameritrade? Genuine curiosity. $25 to buy mutual funds is hilarious, but maybe you have some circumstance that I am unaware of.

It's my HSA. I don't have a choice. Every HSA I've looked at has investment transaction fees.

I don't do this normally haha. Usually I just use Vanguard.

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by stlutz » Thu Jan 26, 2017 12:06 am

Don't make things more complicated than they are. I bought an ETF at Fidelity today. Placed an odd-lot order at the ask price and it executed just over halfway between the bid and ask.

The time spent on the entire process (including logging into my account) was about 90 seconds.

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by grabiner » Thu Jan 26, 2017 9:14 pm

JustinR wrote:
grabiner wrote:It will often happen that you get a better price than the ask, on either a market or limit order. Someone might step in and accept your order at a lower price, or there could be a non-displayed order. For example, orders for less than 100 shares are not reported in the bid and ask. If the ask is $20.02, and I am offering to sell 50 shares at $20.00, your market order or limit order at $20.02 will pick up my 50 shares first, and then buy shares at $20.02 if you are buying more than 50.

What?? I had no idea about that. That's what I'm missing. So there may actually be lots of smaller bids and asks in between the actual bid/ask price?


The only orders which are displayed are unconditional orders for round lots. Odd lots are not displayed in the best ask (although you can see them with book viewers). All-or-none orders are also not displayed, because they do not represent general offers; if I have an all-or-none offer to sell 1000 shares, and you offer to buy 500 at that price, nothing will happen, so my order won't be on the book.

The other phenomenon is that someone may step in and take your order at a better price when it is placed.

Also, if this is the case, couldn't I just buy 1 market order share at a time, checking each time to see that its price doesn't go above the ask? That way I'm guaranteed to get all the cheapest shares available right?


Yes, in theory, but this will be a lot of work. It makes more sense to place your entire order as a limit order at the ask. Usually, it will fill as a whole order, and if it doesn't, you can withdraw the remainder or change it to a different price.

Also, are limit orders "hidden", or are they displayed? So if the current bid is $50, and I put in a limit order at $55 for over 100 shares, does the bid move up to $55?


Unfilled limit orders are the only orders which are displayed. Market orders do not display in the quotes because they are filled as soon as they are made. In this example, either someone will accept your limit order, or nobody will accept it and it will become the new bid. This is important for the market to work; if I see your new bid and I have shares to sell, I may now choose to sell them, knowing that you have offered a better price.
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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by JustinR » Thu Jan 26, 2017 9:35 pm

Thanks for the help guys!

I ended up doing my first trade this morning. The spread was only 4 cents.

I put a limit order for 10 shares at the bid price. It got filled maybe 20 seconds later. I guess for every buyer like me there's a seller willing to sell quick at the bid price. I'll probably do this from now on.

Im happy... I saved 40 cents!!

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by PeteyDink » Fri Jan 27, 2017 2:34 pm

So, the real lesson here is that for most ETFs that people buy for investment, the spread is simply not big enough to worry about. Place a limit order at at the ask price, or maybe a cent or two lower if you're feeling spicy. Don't over think it. Many responses on this forum overly complicate the simple.

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by TropikThunder » Fri Jan 27, 2017 2:48 pm

PeteyDink wrote:So, the real lesson here is that for most ETFs that people buy for investment, the spread is simply not big enough to worry about. Place a limit order at at the ask price, or maybe a cent or two lower if you're feeling spicy. Don't over think it. Many responses on this forum overly complicate the simple.


Could not agree more! Most of my retirement money is in my 403b and IRA, and like OP my HSA is invested through TDA. So, I buy ETF's in my HSA every two weeks when my contributions post. I do like to play with it a little, and get that tiny "I'm a trader!" buzz but I'm fully aware that my clever limit order strategy may save me 5c per share (on a good day!) but since I'm only buying 1 or 2 shares at a time, no harm no foul. :beer

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by livesoft » Fri Jan 27, 2017 3:10 pm

JustinR wrote:Thanks for the help guys!

I ended up doing my first trade this morning. The spread was only 4 cents.

I put a limit order for 10 shares at the bid price. It got filled maybe 20 seconds later. I guess for every buyer like me there's a seller willing to sell quick at the bid price. I'll probably do this from now on.

Im happy... I saved 40 cents!!

Maybe you should have tried one or two cents below the bid price first? Maybe the bid/ask dropped by 4 cents in those 20 seconds and you paid the ask price? How would you know? :twisted:
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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by Fabio » Mon Jan 30, 2017 3:23 am

livesoft wrote:If you were trying to buy 500 shares, then I think that's a slightly different scenario.


Hello livesoft,

how would you approach a bigger purchase? I'm switching accounts and I have to make 2 very large, at least for me, ETF purchases (600+ and 2500+ shares).

The ETFs are irish domiciled iShares (I'm european) and have an average spread of 0,02 $. I pay 0,19% commission on each purchase, max 19 $.

Thank you

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by livesoft » Mon Jan 30, 2017 7:08 am

@fabio, I am unfamiliar with these ETFs, the broker, and the exchange, so I don't feel like I can offer very good advice.

If it costs one-fifth the fee to buy 100 shares as it does to buy 500 shares, then I would experiment to learn things and place 100 share orders. I would start with marketable limit order, but I would also place limit orders to buy below the current bid and see what happens. One can always cancel orders or modify orders.

Sometimes market orders are better, but how does one identify what "sometimes" means? Answer: By experimenting.

In any event, I would probably not place an order for more than 500 shares at a time, but you can experiment with larger orders if you like.
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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by Fabio » Mon Jan 30, 2017 10:15 am

Hello livesoft,

thank you for the reply, unfortunately splitting the purchase would be quite expensive. I'll try placing limit orders to buy below the current bid, as you suggested, and see what happens.

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Re: Bid-ask Spread tips for a first time EFT buyer?

Post by livesoft » Mon Jan 30, 2017 10:23 am

I had some more thoughts. If you tell me (here in thread or by pm) the ticker symbols you wish to buy, then I can look at the equivalents on the US markets and make some comments.

You could spend a few minutes tracking your desired ETFs and US-based ETFs in real-time and see if there are any real differences. I would want to see the "order book" to know how many shares are shown in the order book and what the average transaction size was.

If I saw that for a particular ETF that there was one transaction of about 100 shares every 10 minutes, then I would do something different than if there were transactions every second or two for 200 to 500 shares.
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