trading commissions and limit orders

CFA Level III
#1

Hi, Reference: Schweser notes, Book 4, page 227. Low-cost-whatever the liquidity. The book says that by placing a limit order outside of the current bid-ask quotes, a trader can incur less commissions, spreads and market impact cost. As far as I know trading commissions are not a function of the price limit of a limit order. Please comment. Thanks, MG.

#2

I believe the reference is to “total trading costs” and not just “commissions”. By placing your limit order outside the quoted spread you’re reducing slippage and market impact costs but your order might not get filled so you’re exposed to potentially higher opportunity cost.

#3

Also, sometimes if you place an order outside the current bid-ask quote a broker might lower his bid to grab your trade so you may get a lower explicit cost.

#4

thanks guys.