What you pay for wanting it now

Question

A stock shows 40.00 bid / 40.06 ask. You send a market order to buy and get filled instantly at 40.06. A patient trader instead rests a bid at 40.00 and waits. What did immediacy cost you versus the mid, on a round trip, and, if you did this every trading day, annualized?

Accepted Answer

Cost of one market order. Fair value is the mid, (40.00 + 40.06)/2 = 40.03. By taking the offer you paid 40.06, i.e. 40.06 - 40.03 = 0.03 = 3 	ext{ cents above mid.} That 3-cent half-spread is the price of now, the fee you hand the market maker for not waiting. The patient trader who rests at the bid pays nothing to mid (and may even earn a rebate), but risks not getting filled. Round trip. If you buy with a market order and later sell with a market order, you cross the spread twice, pay the full 6 cents: 	ext{round-trip cost} = 40.06 - 40.00 = 0.06 = 6 	ext{ cents on } \40 = 0.15\%. Annua…

What you pay for wanting it now

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