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Order Types: Getting to Know the Basicsby Randy Frederick, Director of Trading and Derivatives, Schwab Center for Financial ResearchAugust 25, 2008 Whether you're buying or selling a security, the type of order you place can have a significant impact on the time, price or manner in which your order is executed. While many market factors are beyond your control, if you have a clear understanding of how the order you place will be received in the marketplace, you will be much more likely to get the results you desire. Virtually all characteristics of an order can be divided into three categories: time in force, order qualifiers and order types. Time in force (TIF): a special directive that indicates how long an order will remain active before being executed or expired. Order qualifiers: guidelines that modify the execution conditions of an order based on volume, time and price constraints. Order types: the types of orders used for the execution of various trades. Time in Force Day Only orders are good for the current trading session only. This does not include any extended hours sessions that occur before 9:30 a.m. or after 4:00 p.m. Eastern Time (ET). Extended hours orders must be specified as such. Return to Top Good until Cancelled (GTC) orders are good for 60 calendar days at Schwab. Like day only orders, GTC orders apply only to the regular 9:30 a.m. to 4:00 p.m. ET trading session. Return to Top Fill or Kill (FOK) orders require that the order be immediately filled in its entirety. If this is not possible, the order is cancelled. This is one way to find hidden liquidity. Return to Top Immediate or Cancel (IOC) orders require that any part of an order that can be filled immediately is filled, and any remaining shares are cancelled. This is another way to find hidden liquidity. Return to Top Order Qualifiers Minimum quantity orders specify that you require a minimum number of shares to be executed in order to complete a transaction. If the minimum is not available, minimum quantity orders specify that none of the order should be executed.
While this order qualifier may help prevent a fill of 100 shares on a 5,000 share order, it may also prevent your order from being executed at all, as this type of qualifier is prohibited on orders that are sent to the limit order book. It would also require that at least 1,000 shares be executed at a single venue, which may not be possible, although 1,000 shares might be available if the order was broken up into smaller (child) orders and sent to multiple venues. However, you should be careful with minimum quantity qualifiers, as the disadvantages may outweigh the advantages. Return to Top Do not reduce (DNR) orders specify that a broker not adjust the limit price of the order when the stock is adjusted on the ex-dividend date.
Return to Top All or none (AON) orders specify that the order you place must be executed in its entirety or not at all.
While AON order qualifiers may help prevent a partial fill, they may also prevent your order from being executed at all, because they cannot be held on the exchange limit order book. AON orders also require that the entire order be executed at a single venue, which may not be possible, although execution might be possible if the order was broken up into child orders and sent to multiple venues. As with minimum quantity orders, be careful with all or nothing qualifiers—the drawbacks may outweigh the benefits. Return to Top Order types A market order is an order to buy or sell a stock at the best possible price available at the time the order is received in the marketplace. A market order for a New York Stock Exchange (NYSE) or NASDAQ equity will generally be filled at or close to the National Best Bid and Offer (NBBO). The NBBO is a term that refers to the U.S. Securities and Exchange Commission (SEC) requirement that brokers attempt to provide customers the best available bid price when their customers sell securities and the best available ask price when they buy securities. The NBBO is dynamically updated throughout the trading day to show a security's highest bid and lowest offer (ask) among all exchanges, execution venues and market makers registered to trade that security. It is important to remember that factors such as the size of your order, significant news reports and rapidly changing market prices can result in execution at a different price than the NBBO. Additionally, if the size of your order exceeds the number of shares available at the time your order is entered, your order may be split into child orders and executed at several different prices. For NASDAQ securities, Schwab utilizes intelligent order routing technology designed to allow your orders to receive high quality executions. Market orders are normally placed with a day only time in force, which means they will trade only on the business day and in the trading session in which they're placed. Market orders placed after 4:30 p.m. ET will be entered for the next trading day at 9:30 a.m. ET. Because market orders are typically filled very quickly, once they are entered, they generally cannot be canceled. It is important to remember—particularly with large orders or in fast market conditions—that you are never guaranteed the NBBO you're quoted at the time your order is entered.
If this order was for a NASDAQ stock, Schwab's order router would automatically seek to obtain a high-quality execution for your order. This could be accomplished by splitting your order into several child orders and sending it to multiple venues. As with the example above, the average execution price would be greater than the ask price that was quoted when the order was placed. Keep in mind that because quotes can change multiple times per second, market prices could move substantially higher or lower between the time a market order is entered and the time it is executed. This is especially true during times of high market volatility or unusually heavy volume. Orders entered outside of standard market hours are even more likely to experience wide price fluctuations. Return to Top Limit orders are best when your primary objective is to obtain a specific price rather than a quick execution. You can use limit orders to:
Because some venues also offer hidden order types and because large orders of 10,000 shares or more are sometimes held and "worked" by market makers, these orders may not be reported until all executions of displayed limit orders are reported. Limit order executions occur in a similar fashion as the market order example above, except that all executions will occur at the limit price (or better) you specify, at which point the remainder of your order (if any) is entered into the limit order book and becomes part of the displayed quote. Although your entire order will typically be executed with market orders, that's not always the case with limit orders. Also, make sure to keep in mind that even though executions may occur at your price level or better, your order still may not be due an execution. Generally this occurs due to industry trading exceptions, price corrections or executions that may have occurred at different market venues. Return to Top Stop orders come in three main varieties: standard stop order, stop-limit order and trailing stop order. Stop and stop-limit orders are entered and held in the marketplace, while trailing stop orders are held on a Schwab server until execution is possible. The table below shows a comparison of the three stop-order categories.
Stop orders and stop-limit orders are very similar, the primary difference being what happens once the stop price is triggered. A standard sell-stop order is triggered when the bid price is equal to or less than the stop price specified or when an execution occurs at the stop price. Stop orders are typically used to protect an unrealized gain on a position in your account, or, if a stock moves down and a specified price is reached, stop orders also help minimize the losses by selling the position at the market.
In most cases, your stock will be sold at a price that is close to the market price at the time is it is triggered. However, you must remember that a stop order becomes a market order, so in cases where the stock is halted and reopens for trading or when the stock gaps open in the morning (lower than the prior day’s closing price), your execution price could be significantly lower than your stop price. Although stop orders are much more common when selling securities, stop orders can also be used to purchase stock. A standard buy-stop order is triggered when the ask price is equal to or higher than the stop price specified, or when an execution occurs at the stop price (at the same venue where your order resides). Buy-stop orders are typically used to purchase stock above a particular threshold where the investor believes an upward trend may be established.
Return to Top Stop-limit orders are typically used to buy or sell a security at a specified limit price once the security has traded at or through a specified stop price. Therefore, it has two components: the stop price and the limit price, which may or may not be the same. Unlike standard sell-stop orders, with a sell stop-limit order, you must enter both a stop price and a limit price. In most cases, the stop price on a sell stop-limit order will be equal to or above the limit price. As the stock declines in value and the bid price reaches the stop price (or the stock has traded at or below the stop price), the order will trigger and it will become a limit order rather than a market order. Because the order is now a limit order, execution cannot occur unless the stock can be sold at the limit price specified (or better). Additionally, all other characteristics of limit orders apply, as well. To increase your chances of execution on a stop-limit order, consider placing your limit price below your stop price. The further below the stop price you place your limit price, the better chance you have of receiving an execution in a rapidly declining market. A limit order never gives any guarantee of execution because the stock may trade below the limit price before the order can be filled. This often occurs when a stock is reopened for trading after being halted for a significant news announcement, or when the stock opens for trading at a price that is much lower than the previous day's closing price. When this occurs, the stop-limit order will trigger and be entered in the marketplace as a limit order, but the limit price may never be reached.
While less common, buy stop-limit orders can be used to purchase stock at a limit price once it exceeds the trigger price while moving higher. All characteristics are the same except that for a buy stop-limit order, the trigger will occur when the ask price reaches the stop price or the stock trades at or above the stop price. Again, you can increase your chances of execution by entering your limit price above your stop price. Return to Top A trailing stop order is an order in which the stop price will "trail" either the current ask or current bid by the number of points or percentage you specify. As mentioned above, this order is held on a Schwab server until the trigger is reached and then sent to the marketplace.
The primary benefit of a trailing stop order is that it doesn't have to be cancelled and re-entered as the price of the stock increases. Return to Top Although this article is by no means exhaustive, it's meant to help you understand the basics of order types and to provide ideas to help you trade with confidence. Once you’ve succeeded in getting your equity orders filled, be sure to check out my related articles for more ideas on how to protect or generate income from your positions. As always, for additional information on this topic or for assistance with Schwab trading and platforms, please contact your Schwab representative or call 800-435-4000. Important Disclosures The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Examples provided are for illustrative purposes only and not intended to represent actual results. Access to electronic services may be limited, interrupted or unavailable during periods of peak demand, market volatility, systems upgrades or other reasons. (0808-4238) Return to Top |
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