Order Types and Order Tickets

The four order types

A market order executes immediately at the best available price. It guarantees execution and guarantees nothing about price. It is the right order when the customer must get done, and the wrong one in a thin or fast market where the price they get may be far from the price they saw.

A limit order sets a price limit: buy at this price or lower, sell at this price or higher. It guarantees price and guarantees nothing about execution. A limit order can be missed entirely if the market never reaches it, and it can be passed over even when the market touches the limit, because other orders had priority.

A stop order — often called a stop loss — is dormant until the market trades at or through the stop price. That event elects or triggers the order, and it then becomes a market order. Note the consequence: a stop order does not guarantee execution at the stop price. In a gapping market, the election price and the execution price can be very far apart, which is exactly what happens to customers who believe a stop protects them from a crash.

A stop-limit order is elected the same way and then becomes a limit order rather than a market order. It fixes the price problem and introduces the execution problem: in a fast market it may be elected and never filled.

Above the market, below the market

Now the geometry, which is the reusable part.

Below the current market sit buy limits and sell stops. A buy limit is below because the customer wants to buy cheaper than the market. A sell stop is below because the customer owns stock and wants to get out if it falls.

Above the current market sit sell limits and buy stops. A sell limit is above because the customer wants to sell higher than the market. A buy stop is above because the customer is short and wants to cover if it rises — or wants to buy on an upside breakout.

The common mnemonic is BLiSS and SLoBS: Buy Limits and Sell Stops go below; Sell Limits and Buy Stops go above.

A sell stop and a buy limit both sit below the market and both would be triggered by a decline, but they mean opposite things: the sell stop is protective and the buy limit is opportunistic. The exam will describe the customer's objective and expect you to name the order.

One more geometric consequence. Because a stop order becomes a market order on election, and because sell stops cluster below the market, a decline that reaches a cluster of sell stops elects them all into market sell orders and can accelerate the decline. That is a genuine market-structure effect and it is why an exam answer that describes a stop as 'guaranteeing' a price is always wrong.

Adjustments and qualifiers

Open orders on the book are adjusted when the underlying goes ex-dividend, because the stock's price drops by the dividend and an unadjusted order would be triggered by an event that changes nothing economically.

The orders that are reduced are exactly the ones resting below the market: buy limits and sell stops. Orders above the market — sell limits and buy stops — are not reduced. A customer who does not want the adjustment marks the order do not reduce, or DNR.

For a stock split, orders are adjusted for both price and quantity rather than merely reduced.

The time qualifiers: a day order expires at the end of the trading day; a good-til-cancelled order rests until executed or cancelled, subject to periodic confirmation.

The execution qualifiers:

All or none — AON — must be executed in full or not at all, but may be worked over time rather than immediately.

Fill or kill — FOK — must be executed in full immediately, or it is cancelled.

Immediate or cancel — IOC — must be executed immediately to whatever extent possible, with the remainder cancelled. Partial fills are acceptable, which is the difference from FOK.

Market on close — MOC — is executed at or as near as practicable to the close.

A not-held order gives the floor broker discretion over time and price in seeking a better execution, and relieves them of responsibility for missing the market. Note the specific meaning: not-held discretion is about time and price only, which is the same limited discretion a representative may exercise without written authorization, covered in lesson 9.3.

Other terms the outline names include spread and straddle orders, which enter both legs of a multi-leg option position as one instruction so the legs cannot be filled separately.

The order ticket

SEC Rule 17a-3 requires a memorandum of each brokerage order, and the contents are testable because what is absent is as informative as what is present.

Required: the account number or identifier, the security and symbol, whether the order is to buy or sell, the quantity, the price and order type with any terms and conditions, the time of entry, the time of execution or cancellation, the execution price, whether the order was solicited or unsolicited, whether it was entered under discretionary authority, the capacity in which the firm acted, and the identity of the registered representative who accepted or entered the order.

Not required on the ticket: the customer's name. The account number identifies the account, and the name lives in the account record rather than on every ticket. This is a standing exam question with a counterintuitive answer.

Also not required: the customer's address, or the time the trade settles.

The solicited or unsolicited marking deserves emphasis because it does real work later. An unsolicited order is one the customer initiated without a recommendation from the firm, and it changes the analysis under Regulation Best Interest, which attaches to recommendations. Marking a solicited order unsolicited to escape a suitability problem is falsifying a record, and it is a standard finding in enforcement cases about unsuitable trading.

For municipal securities, MSRB Rule G-8 imposes a parallel requirement on the records a municipal dealer must make.