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Avoiding "the spread"


crs223
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Can you please set me straight?

 

Imagine I sell a share of XXX from account 1 and buy a share of XXX from account 2, all "at the same time" (left intentionally vague) and "at the market price", I would imagine that I would be losing a bit of money because the sell price would be lower than the purchase price.  I've been programmed to expect this because it is the "spread" as set by a "market maker".  If that is true, then fine -- someone is doing something so I would expect a cut to be taken.


But what happens if I do the same thing... but this time I specify that the orders are supposed to be filled "market on close"?  Then presumably the buy and sell prices will be identical (would they?).  Seems like a nifty way to "avoid the spread".  If I spent my entire investing career buying/selling "market on close", could I claim that I've "never paid the spread"?

 

I suppose the key to understanding this is to figure out how the "closing price" is agreed upon by all market makers with "market on close" orders -- particularly when there are not an identical number of buyers and sellers... which would be the case most/all of the time.

 

Thank you!

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In most markets there is a closing auction, so by definition there is exactly the same amount of buying volume as selling volume, as that is how the clearing price is decided.

 

Theoretically, you would not have avoided the market maker spread, as your "extra volume" would have to be "matched", which would be by a market-maker taking the other side of the trade and extracting the spread that way. In practice you may save a little of the spread in the more liquid stocks but at the price of not buying or selling at your desired level.

 

 

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