Orders
Types of orders
Day order
Day orders are the simplest of all orders. A day order expires at the end of the trading day on which it is entered if it is not executed by the close.
Good-til-canceled (GTC)
GTC orders will stay on the books of the broker-dealer until they are filled or canceled. FINRA does not mandate a universal GTC expiration date; each broker-dealer instead sets its own GTC time limits as a matter of firm policy, often somewhere between 60 and 180 days. The customer can extend an expiring GTC order upon request, though in most cases will simply rewrite it.
Market order
Market orders are built for speed. They will execute at the next price, which could be higher or lower than the current price, as it is a first-come, first-served process. The order books have lots of people, and the orders get filled on a first-in-first-out (FIFO) basis; the oldest order will be filled first, the newest order last. Generally, it won’t be massive price differentials, outside of volatile markets, but the price could be dramatically different from when placed.
Stop order
Stop orders are conditioned on the underlying security hitting a certain price. Once that stop price is hit, then the order will become a market order. Unlike limit orders, stop orders, if triggered, will always execute, as they become a market order, and market orders will always execute. Stop orders do not care about the price paid; once it becomes a market order, the market order could execute at a higher or lower price than the trigger price of the stop order.
Stop orders are used to “stop a loss”, as in if someone has a profitable position (could be long or short), and wants to “protect” it from losing profit, they could do a stop order. Once the stop price is hit, the position will close, hopefully locking in a profit or stopping further loss.
Example: Sell stop to protect a gain
The client purchased 1000 shares of stock years ago for $10 a share, paying $10,000 for the stock. The stock is now worth $100 a share. The client is going on vacation and is worried about volatility, so they enter a “sell 90 stop”: if the price, currently $100, drops to $90, the order becomes a market sell order and sells at the next available price. If it fills at $90, that locks in about $80 per share of profit, but a stop doesn’t guarantee that price: in a fast-moving market, or if the stock opens below $90 after bad news, the sale can fill well below the stop price. If the price never drops to $90, the order never triggers, and the client can cancel it on returning.
Stop orders are also used with the technical analysis ideas of support and resistance. Support is a price level a stock seems to bounce up from, and resistance is a level it seems to bounce down from. Technical analysts believe that if the price breaks through either one, it will keep moving in that direction until it reaches the next level. To profit from a breakout, someone might place a buy stop slightly above resistance, or a sell stop slightly below support.
Limit order
Limit orders are designed to never execute at a worse price than what the customer sets. Buy limits will not execute for a price above the limit price, just like if you wanted to “buy something at $50 or better”, you’d take $45, you wouldn’t take $50.05. Similarly, sell limits will not execute for a price below the limit price, just like if you wanted to “sell something at $50 or better”, you’d accept $55, but you wouldn’t accept $49.95.
A limit order will not execute merely because its price prints. It needs a contra-side order at the limit price or better, and its turn in line; if the price moves back to the wrong side of the limit first, it won’t execute.
Example: Buy limit execution
A customer enters a buy limit at $50, so the order won’t be filled at any price above $50. If the prints are 55, 53, 54, 52, 49, 51, 55, 59, 70, 100, the order executes at $49, the first print at or below the limit price. Execution depends on a contra-side order being available at that price and on the order’s priority in line, not on any special sequence of ticks. Sell limits work similarly, just in the other direction: they execute at the first print at or above the limit price.
Sometimes, especially if after-hours or pre-hours orders are involved, the limit order may actually be immediately placeable. If a client places a buy limit at $50, and the opening price is $49.95, the customer’s order will execute at the $49.95. This is referred to as a marketable limit order.
Stop-limit order
Stop-limit orders combine a trigger price with a limit price. It is like a stop order in that there is a trigger price, but instead of a normal stop order that becomes a market order, a stop-limit order, when triggered, becomes a limit order, so it also has a limit price. The stop and the limit prices of the stop-limit order could be the same, or they could be different. It effectively will set a price band where the trade will execute, but because it has a limit order involved, just because the prices get hit, it doesn’t mean the order executes if the market doesn’t stay in that price area long enough.
Immediate-or-cancel (IOC)
This is one of the 3 orders that are closely related and easily confused. IOC, AON, and FOK all deal with whether the rep has time to execute, whether partial fills are allowed, or neither of those.
Immediate-or-cancel is the one that the rep does not have time, but they can do partial orders. If a client calls early in the trading day and says “I want you to buy me 5000 shares of ABC at $50 IOC”, and all we can do is 3000 shares at $50, then the client gets the 3000 shares, and the remaining order is cancelled.
The order must be done right here right now, to the best of the rep’s ability, but if they can only get some, then the client only gets that some. There is no time, right here right now, whatever can’t be done right here right now, is canceled.
All-or-none (AON)
Another of the 3 confusing orders, All-or-none requires the order to be executed in its entirety or not at all, but it gives the representative time. The full amount can be matched against more than one contra-side order, but only all at once; the order can never be built up from partial fills over time.
If a client calls early in the trading day and says “buy 5000 shares of ABC at $50 AON”, the rep has all day to find those 5000 shares at $50 or better, more time if the AON is marked GTC, but there are no partial fills. If all 5000 shares are available at $50 or better at the same moment, even from two sellers of 2,500 each, the order fills; if only some of the shares can be found, nothing executes and the rep keeps looking.
Fill-or-kill (FOK)
The last of the 3 confusing order types, this one basically combines the other two; no time, no partials.
If a client calls early and says “buy 5000 shares of ABC at $50 FOK”, all 5000 shares must be bought immediately. If only 4,990 shares are available at $50 or better at that moment, the entire order is killed. No partials, and just like the IOC, there is no time to keep looking.
A FOK order must be filled in its entirety and immediately; if the full quantity cannot be executed at once, the whole order is canceled.
Order priority
There are lots of orders that get placed, so there needs to be a priority to know the order to execute them. Market orders have top priority and will be executed on a first-come, first-served basis. Limit orders will follow, in priority order based on their limit price. Buy limits get priority from highest price to lowest, while sell limits get priority from lowest price to highest.
Example: Buy limit priority
If 4 buy limits were submitted with limit prices of $50, $50.50, $50.25, and $50.75, the priority would be $50.75 first, as that buyer is willing to pay the most, then $50.50, $50.25, and finally $50, even though that is not the order they were received.
Example: Sell limit priority
If instead 4 sell limits were submitted with limit prices of $50.75, $50.50, $50.25, and $50, the priority would be $50 first, as that seller is willing to receive the least, then $50.25, $50.50, and finally $50.75, again regardless of the order they were received.
If identical limit-priced orders are submitted, their priority is first-come, first-served.
Closing price orders
There are 2 types of orders designed to be executed at the closing price of the session. They could be a market, or limit, as in market-on-close (MOC), or a limit-on-close (LOC). Both function similarly to their earlier discussed cousins. MOC don’t have a price, LOC does have a price and won’t execute at a worse price.
For the NYSE, the MOC and LOC orders can be placed, modified, and cancelled up until 3:50 pm ET each day. After 3:50 pm ET, the orders can no longer be placed, modified, or cancelled, outside of rare situations.
For NASDAQ, they vary. MOC orders can be placed up until 3:55 pm ET and LOC orders up until 3:58 pm ET, but both can only be modified or cancelled up until 3:50 pm ET. After those times, again, outside the rare situations, the orders cannot be placed, modified, or cancelled.
The reasons could be that the investor suspects that there could be dramatic news released overnight, after hours earnings call, wants to make sure they exit a position by the end of the day, or similar ideas.
Reviewing the trade blotter for exceptions goes beyond closing-price patterns - Regulation SHO’s short-sale rules, trading halts, and market-access controls are covered later in the course, in the Federal rules and regulations chapter.
Solicited and unsolicited orders
An order is solicited when the representative recommended the trade, and unsolicited when the customer placed it on their own initiative, without a recommendation. Firms mark the order ticket one way or the other. It matters because Regulation Best Interest and FINRA’s suitability rule (Rule 2111) apply to recommendations, not to trades a customer directs on their own.
The mark has to match the facts. A trade is solicited if the representative suggested it, even as one of several ideas the customer chose from.
When a customer insists on a trade the representative thinks is a poor fit, Regulation Best Interest doesn’t require the firm to refuse the order. The representative shouldn’t recommend the trade, should explain the risks, and can ask the customer to acknowledge them in writing before entering the order marked unsolicited.
Marking a recommended trade as unsolicited is a violation. The ticket is one of the firm’s required records (SEA Rule 17a-3), and those records must be accurate, so a mismarked ticket violates FINRA Rules 4511 and 2010.