The offering of liquidity through limit orders is a real service to the market, and on average gets rewarded in lower overall execution costs. In choppy markets, it can really add value.
I urge all investors to place limit orders as a normal practice. Better not to get filled on a few orders every now and then, than to get ripped off by market makers when a market order hits a thin market and you end up with a lousy fill.
Patience is a virtue in trading. Don’t insist that you will get a full position on a stock you you want to own. Rather, have multiple companies that you might want to own at their respective prices, and own the ones that the market is willing to sell to you.
When you think about “flash crashes” and what drove them, there are many factors involved, but one thing is clear: someone placed a market order at the wrong time, asking to buy or sell, no matter what.
Personally, anytime I place orders that are large relative to the ordinary volume of the market, and/or where the bid/ask spread is wide, I use discretionary reserve orders. Say the bid is 20.50 for 200 shares, and the ask is 21.31 for 300 shares, and I am looking to buy. I would place a discretionary reserve order showing 100 shares at 20.49, but offer 41 cents of latitude, but with 2000 shares available to be bought. In doing this, the bid/ask does not change, but if a program trade sweeps through the market seeking to sell at less than 20.90, my trade executes, and some will wonder, “Where did that come from?”
My view is that with high frequency trading, managers must adopt tactics, particularly on less liquid stocks, that we become invisible liquidity providers. We match stealth with stealth, but look to get good fills on solid companies at very good prices. We become market makers in a sense, up to the level of our price limits.
If I have done my fundamental homework right, putting out limit orders, even those that are “good till cancelled” offer value to me and my clients, because we get shares at prices that offer good value, and and sell shares at prices that represent full value or more.