Market Orders vs Limit Orders: Cost Tradeoffs
The tradeoff in one sentence
Market orders maximize fill certainty. Limit orders maximize price control.
In prediction markets, where price range is bounded and liquidity can be thin, this tradeoff often decides whether your edge survives costs.
Market orders: what you gain and what you pay
What you gain
• Immediate execution against the order book.
• You know you will get filled, which matters when timing is critical.
What you pay
• You cross the bid ask spread by design.
• If top of book depth is small, you can fill across multiple levels, creating slippage.
• You are typically a taker under maker taker fee models.
Limit orders: what you gain and what you risk
What you gain
• You set the worst acceptable price.
• You can get price improvement and lower realized effective spread.
• If your order rests, you are more likely to be treated as a maker for fee purposes.
What you risk
• You may not fill at all.
• You may fill partially and leave exposure incomplete.
• You can get filled only after the market moved, which can be good or bad.
Key concept: a limit order can behave like a market order
If your limit price crosses the spread, you are not providing liquidity. You are removing it.
Example: best bid 48c, best ask 52c.
• Buy limit at 52c will usually execute immediately and behaves like a market order.
• Buy limit at 50c rests inside the spread and may or may not fill.
How to measure the difference in real costs
Do not compare order types based on anecdotes. Compare them using realized metrics:
• Capture a clean midquote snapshot at submission time.
• Compute execution price using VWAP from fills.
• Compute effective spread.
• Add trading fees to get all in cost.
When to prefer market orders
Market orders make sense when:
• Timing matters more than price (you must get filled now).
• The book is deep and spread is tight.
• Your size is small relative to depth, so slippage is minimal.
• You can accept the cost as part of the strategy.
When to prefer limit orders
Limit orders make sense when:
• The market is thin and spreads are wide.
• You can wait for a better fill.
• You want to cap worst-case execution price.
• Your strategy depends on low costs and repeatable execution.
Practical rules that work in prediction markets
Rule 1: If the market is thin, never assume a market order will fill near the top of book.
Rule 2: If you need certainty, use a limit order that crosses the spread, but treat it as a market order in your cost model.
Rule 3: If you use resting limits, log how often you miss fills. Missed fills are an invisible cost.
Rule 4: Size for the book. Large size in thin depth creates slippage regardless of order type.
Common mistakes
Choosing order type without looking at depth: depth is often more important than spread.
Comparing fills without VWAP: multiple fills must be combined correctly.
Ignoring fees: maker taker and platform fees change the math materially.
Only measuring entry: costs matter on exit too, which drives round trip cost.
Takeaway
Market orders are about speed. Limit orders are about control. The correct approach is to measure realized execution costs and choose the order type that fits the market condition and your strategy goals.
Related
• Order Book Basics for Prediction Markets