ETF Market Orders Placed After Hours

[Tortoise]

In general I understand how ETF market orders work: You agree to buy/sell the shares at the best available price (i.e., market price) at the time the order of submitted, so the order is filled almost immediately. For a widely traded ETF during normal trading hours, the bid-ask spread will be small, so you have a pretty good idea of what price your order will be executed at when you submit the order.

However, I'm a little fuzzy on what happens if you submit a market order after trading hours (for example, in the middle of the night) and the ETF's bid-ask spread after-hours is very large. For example, right now the after-hours bid and ask prices for VTI are 61.63 and 83.42; that's a massive spread of 35%! If I place a market buy order for VTI right now, does that mean that when trading begins tomorrow morning, my order will be filled at the ask price of 83.42? If so, that's... well, the worst deal ever. I'd be getting royally screwed.

My guess is that it doesn't work that way, because if it did, that would be ridiculous. Are market orders placed after-hours typically not executed until trading has commenced for a few minutes and the bid-ask spread tightens up considerably? I would certainly hope so...

(BTW, I understand that a way around this is just to place a limit order instead of a market order. But I'd like to understand how market orders work in this situation.)

[notsheigetz]

I don't think most brokers will allow market orders in the after-hours. You are usually required to set a limit price, IRRC.

Fidelity allows you to do it but you get a strongly worded warning.

I remember ignoring the warning when I bought my first ETF to set up my PP so I have done the experiment you are asking about. As I remember it, the order was filled at something close to the previous day's closing and not the Ask price.

I may have gotten lucky however as that warning is obviously given for a reason. I'm now in the habit of only doing trades when the market is open. Much simpler.

[craigr]

I would only submit ETF trades during normal market hours. It eliminates potential problems.

[notsheigetz]

For all intents and purposes, it trades the same way as if during regular trading hours.  If you place market buy order right now, it'll exhaust the asks until it meets your quantity.

You MUST look at the level 2 depths.  Because volume is so light, there's almost no depth to it.  Even if you see 83.42, chances are it's only for a very small number of shares.  The next ask might be 120.  I've seen people post bids at $0.01 for what's normally $100 shares to catch people putting in off-hour market orders.

Of course, this assumes your broker is letting you trade off hours.  Some still display quotes but any market orders are queued for the start of next day.  A lot of bank/retail brokers seem to do this.  You need to ask to make sure they don't execute it.

If you're using something more trade-oriented like Interactive Brokers, then they'll execute it immediately.

Personally, I didn't understand a single word of that so I'll stick with my plan to only do trades when the market is open.

The way I interpreted the warning from Fidelity when you place a Market order with the market closed, is that significant things could happen before it gets filled, like if you where buying shares in the Bank of Cyprus the night before the SHTF.

[Tortoise]

I would only submit ETF trades during normal market hours. It eliminates potential problems.

Submitting limit orders after-hours should be fine though, right?

The main thing is that often I don't have a lot of time during normal trading hours to place ETF trades since I'm busy at work. It's nice to be able to place the ETF trade in the evening while I'm at home, knowing the trade will be executed in the morning when trading resumes. So maybe I should just stick to limit orders, using the ETF's closing value for that day?