When I used to daytrade long time ago, I learned some trick from a real dot com story (sorry, I can’t find the link now). The story is about army of traders going against market makers of the stock market. A market maker of the stock market bring together the buyers and sellers of the market closer by posting bid and ask that are closer to each other, reducing the spread. The bid and ask they post are based upon all the information from limit orders in the queues that normally one cannot see, unless one subscribes to Level II quote. The gist of the story is that the army of traders drove up the dot com stock price by hitting market makers either when the market was less liquid. Since the market makers were forced to post an ask price even when there is no one who want to sell, these traders basically continuously hit the ask posted by market makers, and forced the market makers to be shorted of the dot com stock. The money amount was so large, and the buy orders so organized that market makers were forced to cover their large short positions, and ended up driving up the stock price even higher.
So how does one tell from a bid/ask by market maker from a real order by some other traders? When you bring up the bid/ask size, if you see something like 1×7 (100 shares bid x 700 shares ask), or 6×1 (600 shares bid x 100 shares ask), the 1 which represents for 100 shares is very often the order posted by market maker. Unless the stock is very thinly traded, there is usually more than 1 market maker. If there are 2 market makers, then both of them will be posting 100 shares at the given price. But on your trading screen, it will still show only 1 (either for bid or ask size). Now here is the real difference between market order and limit order. At this time, let’s say if you place a market order, what you will get is 100 shares at the quoted bid/ask price, and then the rest of shares will come off from the hidden queue of the limit orders which often can have a substantial price difference from your very first 100 shares. But if you place a limit order right at the bid/ask price, you can actually get MORE than 100 shares at your desired price if there are more than 1 market maker. Essentially you will be either buying/selling directly into the hands of these multiple market makers.
I have tried this several times myself. Most of the time, I would get two or three separate 100 shares filled when I placed an order to hit at the 1, and then the rest of the shares became another limit order in the stock market (which you could cancel immediately if you want to). And once I cancelled my limit order, very often I would see that the market makers refuse to bring the bid/ask closer for fear of being hit again, and simply let the next highest bid or lowest ask to show up. The bid/ask would suddenly widened at that time, until market makers feel that they have sufficient information to post their bid/ask without incurring more risk, or that the trading volume picked up without the need of orders posted by market makers.
So next time if you really want to buy or sell, but finding that there is not enough size for you to get in or get out, try this. I’m pretty sure that you will be pleasantly surprised. Paying an extra commission for your limit order may worth your money. (Exceptions are of course that there is only 1 market maker, or that 100 shares are a real 100 shares by a buyer/seller, in which case no market maker orders will exist. And I am not sure that the same scenario applies to option orders.)
