What is At-The-Market?

An at-the-market order buys or sells a stock or futures contract at the prevailing market bid or ask price at the time it gets processed. An at-the-market order usually executes within moments of being received and can be placed anytime during market hours. If received after regular market trading hours, this order type gets executed as soon as the market reopens.

Understanding At-The-Market

At-the-market orders are typically used by investors who seek immediate execution of their desired transaction. When an investor places an order at-the-market, he or she is willing to forgo an execution at a price of their choosing for the prevailing market rate and the speediness of buying, or selling, the desired security.

During extreme bull markets, buy limit orders (orders that only trade at the limit price or lower) often don't get executed as investors are prepared to pay a premium for stocks they want to purchase. Likewise, sell limit orders (orders that only trade at the limit price or higher) often remain unfilled during bear markets when prices gap lower. Both scenarios can cause investors considerable angst when trying to deal.

Key Takeaways

  • An at-the-market order buys or sells a stock or futures contract at the prevailing market bid or ask price at the time it gets processed.
  • At-the-market orders are typically used by investors who seek immediate execution of their desired transaction.
  • Investors who execute a trade using an at-the-market order run the risk of paying higher prices than necessary.

Risks of Using At-The-Market Orders

Investors who execute a trade using an at-the-market order run the risk of paying higher prices than necessary, particularly when trading small cap stocks. These stocks are often illiquid and have wide spreads that are several basis points away from the last sale price. For example, a stock that only trades several thousand shares a day may have a bid price of $2, an ask price of $3 and last sale price of $2.15. When trading stocks with a wide bid/ask spread, investors should use the last sale price as a reference point to determine if placing an at-the-market order is appropriate.

Benefits of Using At-The-Market Orders

Investors can use an at-the-market order to complete a large trade that needs to be filled by a specific date. For instance, a fund manager might need to complete a trade before a stock goes ex-dividend to receive the distribution. Any portion of the order that was on a limit and not executed can be completed by using an at-the-market order, albeit at a higher price. At-the-market orders are also useful for investors who do not have time to watch the market and wait for a limit order to execute.