Narcis Miclaus

6 min read

Personal finance, from zero Lesson 28 / 60

Price discovery, bid-ask, and slippage

Why you pay slightly more than the quoted price, how spreads work, and the difference between market and limit orders for retail investors.

Sofia placed a market order for 100 shares of iShares Core MSCI World. The price she saw was €101.20. Her confirmation showed she paid €101.35. Where did the €15 go?

The spread. Today’s lesson is how exchange prices actually work, what “bid-ask” means, the different order types you can use, and how small retail investors can avoid the worst slippage traps.

The order book

Every stock exchange maintains an order book — a live ledger of buy and sell orders waiting to be filled.

For a given ETF, it might look like:

ASK (sellers)
€101.40 — 200 shares available
€101.38 — 150 shares available
€101.36 — 100 shares available  ← best ask
---
BID (buyers)
€101.32 — 80 shares wanted  ← best bid
€101.30 — 300 shares wanted
€101.28 — 500 shares wanted

Best ask (€101.36) is the lowest price a seller is currently willing to accept. Best bid (€101.32) is the highest price a buyer is currently willing to pay. Spread = ask − bid = €0.04 in this example (roughly 0.04% of price).

If Sofia places a market order to buy, she pays the best ask (€101.36). If she places a market order to sell, she receives the best bid (€101.32). The difference — the spread — is the cost of immediate execution.

Why spreads exist

Market-makers (professional traders with exchange quoting obligations) profit from the spread. They provide liquidity:

  • Always willing to buy at the bid.
  • Always willing to sell at the ask.
  • Earn the spread as compensation for the risk of holding inventory.

Without market-makers, buyers and sellers would have to wait for each other. With market-makers, there’s always a price.

Tight spreads (€0.01-0.04 on popular ETFs) = liquid, heavily-traded products. Wide spreads (€0.50+ on small ETFs) = illiquid, low volume.

What drives spread size

Four factors:

  1. Trading volume. High-volume ETFs have many market-makers competing, tight spreads.
  2. Volatility. Volatile markets = wider spreads (more risk for MM).
  3. Time of day. Spreads widen at open and close, tighten midday.
  4. Fund size. Large AUM ETFs typically have tighter spreads.

For Italian retail buying popular ETFs (iShares, Vanguard, Xtrackers at €500M+ AUM), typical spreads on Borsa Italiana during normal hours: 0.03-0.10% of price.

For smaller ETFs or ones listed on less popular exchanges: can widen to 0.30-1.00%.

Market orders vs limit orders

Two main order types:

Market order

“Buy/sell at the best available price, immediately.”

Pros:

  • Guaranteed execution (as long as some quantity exists on the other side).
  • Simple.

Cons:

  • You don’t know exactly what price you’ll pay.
  • In fast markets or thin books, can execute at prices significantly worse than quoted.

Limit order

“Buy at price X or lower; sell at price X or higher.”

Pros:

  • You control the maximum price paid (or minimum received).
  • Can sit in the book waiting for the market to come to you.

Cons:

  • Might not execute if market doesn’t reach your price.
  • Requires more thought.

Rule for retail: for small orders (< €10,000) on popular ETFs, market orders are usually fine — spread is tight, slippage minimal.

For larger orders or less-liquid products: use limit orders, place at the best-bid or a few ticks higher.

Slippage

Slippage = difference between the price you expected and the price you got.

Sources of slippage:

  1. Spread. Expected midpoint, paid ask. Half-spread worth of slippage.
  2. Market movement. Between order placement and execution (seconds to minutes for retail), price may have moved.
  3. Depth impact. A large market order eats through multiple levels of the book. First 100 shares at €101.36, next 200 at €101.38, etc.

For €1,000 retail orders, slippage is usually €1-5 — material but not catastrophic.

For €100,000 orders, slippage can be €100-500 — worth caring about.

Limit order strategy for retail

For buying a popular ETF with a modest position size:

  1. Look at current bid-ask.
  2. Place a limit order at the current best bid (or 1-2 ticks above).
  3. Wait 5-10 minutes.
  4. If not filled, raise slightly and wait more.
  5. Usually fills within 30 minutes at saved-spread pricing.

This saves 0.02-0.10% per trade. Over a career, adds up, though not dramatically for small retail.

Time-in-force options

Most brokers let you specify how long an order stays active:

  • Day (giornaliero): expires at end of trading day.
  • GTC (Good Till Cancelled): stays active until filled or you cancel (often capped at 30 days).
  • IOC (Immediate Or Cancel): executes immediately, cancels unfilled portion.
  • FOK (Fill Or Kill): execute entirely immediately or cancel entirely.

For retail buy-and-hold: Day orders are typical. GTC useful for limit orders you want to leave parked.

Stop-loss and stop-limit

Stop orders trigger when price hits a level, then submit a market (stop) or limit (stop-limit) order.

Common use: protect against large losses. “If stock falls below €80, sell.” Sounds prudent; in practice has two problems:

  1. Gaps. Stock can gap below your stop overnight; you sell at a much worse price than intended.
  2. Flash crashes. Short-lived spikes in bad prices can trigger stops at terrible prices, even if price recovers minutes later.

For long-term ETF investors, stop-losses are mostly unnecessary. Don’t use them reflexively.

Currency order specifics

If you trade an ETF in a currency different from your account currency (rare for Italian retail buying EUR-listed ETFs, common if trading US-listed ETFs), you’ll pay an FX conversion fee. Typical: 0.25-0.75% at retail brokers.

On a €10,000 position: €25-75. Per round trip.

Avoid by buying EUR-listed variants of the same ETF whenever possible.

When to trade

Best execution quality times on Borsa Italiana:

  • Avoid first 15 minutes after open (9:00-9:15). Volatility from overnight news.
  • Avoid last 15 minutes before close (17:15-17:30). Close auction can create volatility.
  • Mid-day (10:30-16:00) generally smoothest.

This matters more for active traders than buy-and-hold. For monthly PAC buyers, any time is fine.

Batch orders and PAC

For investors doing regular monthly investments (PAC), the bank or broker usually batches your order into one execution each month. You pay the spread at that moment and get allocated the shares.

Some brokers offer fractional ETF shares via PAC (e.g., Scalable, Degiro), which lets you invest specific euro amounts rather than integer share counts. Convenient.

Smart retail execution summary

Rules for small retail buying popular UCITS ETFs on Borsa Italiana:

  1. Use market orders for amounts < €2,000 during normal hours — slippage is tiny.
  2. Use limit orders for larger positions (> €5,000) or less-liquid products.
  3. Always trade EUR-listed ETFs when available — avoid FX costs.
  4. Avoid first and last 15 minutes of trading day — spreads wider.
  5. Don’t overthink timing for long-term holds. The difference between buying Monday and Tuesday is negligible over 20 years.

What to do with this lesson

Three habits:

  1. Check spread before trading. If > 0.20% on a popular ETF, something’s off (wrong listing? off-hours?). Reconsider.
  2. Use limit orders for anything over €5,000. Simple, saves ~0.05-0.15% per trade.
  3. Don’t execute trades in the first or last 15 minutes of market hours for long-term positions.

Sources

  • Borsa Italiana — Regolamento dei mercati. https://www.borsaitaliana.it/borsaitaliana/regolamenti/regolamenti.htm.
  • Consob — Best execution guidelines. https://www.consob.it/web/investor-education.
  • FINRA (reference for spread/slippage definitions) — https://www.finra.org/.

Next lesson: volatility and risk — the math that isn’t scary. Standard deviation in plain language, why “7% per year” hides wild swings, and what this means for your plan.

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