How to Trade ETFs: Market vs. Limit Orders and When to Use a Block Desk
Learn why limit orders may give you the upper hand when trading ETFs, how ETF liquidity and market volatility can affect outcomes and why the block desk is an advisor’s best resource for evaluating and executing ETF trades of all sizes.
Key Takeaways
Order type shapes your outcome. Market orders prioritize speed, while limit orders prioritize price control. That distinction can materially affect the price you ultimately receive.
Quoted spreads and average daily volume (ADV) on the screen show only a portion of what’s available. ETF liquidity and pricing are enhanced by block desks, market makers and the ETF primary market structure.
When you’re uncertain about best execution, consult with the block desk. From large to small trades, the professionals on the block desk are available to answer questions about liquidity, pricing and execution strategy, help you identify the best path forward and facilitate your ETF trade.
Investors may be overlooking ETF trading strategies that can help them navigate volatile markets, access deeper liquidity and secure cost-efficient execution. The order type you choose—and how you leverage the resources available to you—can affect the flexibility you have and ultimately the price you pay.
Let’s look more closely at the differences between market and limit orders and when additional trading support may help.
When Should You Use a Limit Order vs. a Market Order?
While market orders tend to be the default order type for trading platforms, limit orders may give you the upper hand when trading ETFs, especially in volatile markets.
Market Orders: Executing Quickly at the Best Available Price
A market order tells your broker to buy or sell a security immediately at the best available market price. But “best available” does not necessarily mean the price currently visible on screen for the full size of your order. In fast-moving or less liquid conditions, the final execution price can differ materially from what you expected when you placed the trade.
While market orders can be efficient for speed, they always leave ETF investors vulnerable to changing market conditions.
How Does Market Volatility Affect ETF Bid/Ask Spreads?
Uncertainty leads to market volatility—and wider spreads between the bid and ask prices you see on the screen as market makers look to control their risk during periods of rapid price fluctuations.
Bid price – the highest price a buyer is willing to pay.
Ask price – the lowest price a seller is willing to accept.
ETFs can still provide efficient market access during periods of volatility, but timing matters. Using limit orders and avoiding less efficient trading windows (e.g., market open and close) can give advisors greater price control when market conditions are moving quickly.
Why Are Limit Orders Often Recommended for ETF Trades?
Limit orders are often the preferred order type because they give investors control of the execution price. A buy or sell order is executed only if the market price reaches or is better than the set limit price. This feature makes limit orders especially useful for ETFs for two notable reasons:
Quotes can change rapidly throughout the trading day.
More liquidity may exist in the market than the observed price and size available indicate.
Because a limit order prioritizes price over timing, you may have to wait longer for a trade to execute, particularly when markets are unsettled. But a limit order has your back if market conditions suddenly change; the order will not execute if the market never reaches your specified limit. Additionally, a limit order allows you to assess markets in times of volatility and adjust your limit price.
If you entered a day-limit order, the order automatically expires at the end of the day.
A good-til-canceled (GTC) limit order is an order to buy or sell a stock that lasts until the order is completed or canceled. Brokerage firms may limit the time investors can leave a GTC order open. These limits can vary from broker to broker.
A limit order puts price control in your hands. If you want to protect the price of your ETF trade, whether it's large or small, use a limit order—even if the ETF has high volume.
A savvy move with limit orders for ETFs is to set your price a penny or two above the best offer being shown if buying or below the best bid if selling. This increases the likelihood that the order is filled completely. If there is room for price improvement, the trade executes at the improved price.
How Market and Limit Orders Work During Market Volatility
1,000 Shares of ABC ETF, Current Price $50 Per Share
How Do You Decide Between a Market Order and a Limit Order?
Choosing between a market and limit order depends on your priorities—speed, price control, market conditions and risk tolerance.
Trade execution priority: Market orders prioritize immediate execution, while limit orders prioritize price control. Market orders can be used when speed is paramount for smaller trades and price is not an issue.
Volatility and uncertainty: When there is a high degree of uncertainty or volatility in the markets, market orders may lead to significant price slippage—when the execution price deviates substantially from the expected price. Limit orders help mitigate that risk by allowing you to set specific price thresholds. Limit orders may also allow additional liquidity to be brought to the market after market participants assess the size of the order.
Time sensitivity: Market orders typically are executed faster, making them suitable for time-sensitive situations. The investor will pay the price at which the trader fills the order. Trades may occur at prices significantly beyond the price shown on screen.
On the other hand, limit orders may take a while to execute, depending on the specified limit price, and therefore require more patience. Furthermore, you may need to adjust the limit order price based on the volatility during the time the order is placed.
Risk tolerance: Market orders carry a higher risk of price fluctuations, while limit orders provide greater control over the execution price. Risk-averse investors may opt for limit orders to minimize potential adverse price movements.
ETFs have different liquidity layers that allow investors to trade in amounts that can far exceed an ETF’s ADV without significantly affecting the price.
When Should You Use a Block Desk for an ETF Trade?
The block desk is one of your best resources to attain best execution on an ETF trade—whatever the size. (Block desks include the institutional desk at an advisor platform, the ETF desk at a broker-dealer.)
It never hurts to get the block desk’s opinion on an ETF trade. The traders have years of experience in high-pressure situations, insights into the underlying securities and markets of an ETF and strong networks of relationships to help advisors receive best execution.
For large trades, traders on the desk can source shares from multiple ETF market makers. They can also trade in increments to manage the effect the trade could have on prices or obtain a quote to execute the entire trade. And they may determine that it’s a better trading strategy for the advisor to go through the desk rather than directly into the market.
The general rule of thumb is that the block desk should always be used for orders that are 2%-3% of the ETF’s ADV or $500,000 in value, whichever is smaller.
The block desk can also be a source of liquidity for transactions in ETFs with lower volume or assets under management.
Why Use a Block Desk for Orders in Low-Volume ETFs?
The block desk’s relationships with ETF market makers allow it to seek best execution for trades. An ETF block desk can source the best price for an order from multiple ETF market makers via the request-for-quote (RFQ) mechanism. The ETF market makers can compete for that trade by providing their price for the value of the order.
With a few simple steps, low-volume ETFs can trade efficiently—unlocking opportunities that many investors overlook.
The ultimate source of ETF liquidity comes from its open-ended structure. Unlike stocks that have a set number of shares, ETF market makers through authorized participants can create and redeem shares based on investor demand. The creation and redemption process ensures there is sufficient inventory to fill investors’ orders and helps execute trades with little or no impact to the market.
Develop a relationship with your custodian’s institutional trading desk. Here are considerations when talking with the traders:
- Talk through specific size minimums or requirements before sending the trade.
- Identify the best way to submit the trade so that it routes to the block desk.
- Discuss technology requirements for submitting trades. Note: Some desks charge a fee to place a trade.
Why Is It Risky to Trade at the Market Open and Close?
It’s common practice to wait 15 minutes after markets open. This allows time for the underlying securities to open and trade, providing greater price transparency for market makers to quote the ETF more efficiently.
ETF portfolios are often made up of many securities that don’t necessarily open the moment the market opens. These variations can lead to pricing inefficiencies, causing the differences between bid and ask prices to increase. Extreme market volatility can make those spreads even wider.
ETF spreads can also widen toward the end of a trading session, especially in times of market stress. This can happen because it can be more difficult for market makers to hedge positions going into the market close.
If you need to trade near the end of a trading session, consider placing orders at least 15 minutes before the market close. The size and depth of the ETF market may be better at that time.
How Smarter ETF Trading Can Support Better Client Outcomes
Choosing the right order type, understanding the deeper layers of ETF liquidity and involving the block desk when questions arise can help advisors approach trades with more control and confidence across market conditions. As demand for active ETFs continues to grow, disciplined execution may become an increasingly important part of realizing the full value of the ETF structure.
Advisors who pair thoughtful investment selection with smarter trading practices may be better positioned to help clients access the exposures they want—while making execution a competitive advantage.
Have more questions? Reach out to an issuer’s ETF capital markets desk for additional trading insights. You can contact the American Century Investments® Capital Markets Desk through your American Century or Avantis Investors® representative.
What’s driving active ETF demand—and the divide? Explore the active ETF boom.
Common ETF Order Types: How to Choose the Right Strategy
Each order type serves a distinct purpose and involves considerations that can lead to different outcomes for your clients.
Below are common order types with guidance related to ETF trades, as well as contacts to assist you in executing these types of trades:
Not recommended for ETF block trades or even smaller ETF trades, given no price control. Guaranteed execution and speed of execution are the main benefits of market orders.
Recommended for both block trades and smaller ETF trades, given full price control. A buy order will only execute at the trigger price or lower, and a sell order will only execute at the trigger price or higher.
A held order is the same as a market order and is not recommended for ETF trades.
Recommended for large ETF trades, as the broker assesses the market to achieve efficient execution and generally requests quotes from more than one ETF liquidity provider to execute at the best price.
Another order type recommended for large ETF trades. It is similar to a market-not-held order, but offers price control from the limit order price protection. The trade will execute if offers from liquidity providers are inside the limits given to the floor broker.
Not recommended for ETF trades. Once the stop (trigger) price is reached, the stop order becomes a market order, exposing investors to price movements.
Recommended for ETF trades when an investor wants a stop designation. Once the trigger price is reached, the stop order becomes a limit order. The limit price then provides full control over the final execution price.
**Most advisor platforms have institutional desk available to assist in trading securities.
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Source: Bloomberg, American Century Investments 08/31/2023.
Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.