Queue position and adverse selection

The queue trap

Getting filled on a limit order is not good news in itself: you are filled because someone in more of a hurry, often better informed, sold to you or bought from you. That is adverse selection: the unfavorable selection of the orders that reach you.

The pro's answer

• Enter passive only where there is confirmed absorption: you want to be in the queue behind an iceberg that defends, not alone facing the flow.
• Otherwise, pay the spread and enter aggressive on the signal: speed is worth its cost. Two ticks of spread on the NQ is $10; a passive entry that gets traded through is often 20 points.
• Always reason in terms of expectancy, execution cost included: a better entry price that lowers the hit rate improves nothing.