Of A Commodity Trader:
Mechanics of Trading: Orders
on any illustration to enlarge.
traders not on the exchange floors must initiate and exit trades
by giving orders to their brokers. These orders are relayed to
the floor where they are given to floor brokers for execution.
most common and basic order is the market order. This order simply
gives the amount of the commodity that the customer wants to buy
or sell. The market order instructs the floor broker to initiate
the transaction at the current market value. The brokers are instructed
to get the best possible price, but, as a practical matter, the
floor broker will take the bid price if trying to sell and take
the offer price if trying to buy. Only on exceptionally large
trades and only if given discretion will the floor broker actively
try to seek out a better price. The market order is best used
when speed is important. The market order is filled essentially
on entering the pit. It can be useful for a fast-moving market
where the trader needs to get in or out quickly to initiate or
exit a trade. Traders may also use a market order when prices
have reached a level where they wish to initiate a trade. Exhibit
3-4 gives an example of a market order.
market order is the simplest and easiest order to enter. The customer
states, for example, "Buy one December Value Line at the
market." It is the basis from which all other orders flow,
elaborating and setting limits on the basic market order.
price limit order instructs the floor broker to execute the trade
at the stated price or better. For example, "Buy one December
Value Line at 162.00 limit" means to buy the December Value
Line contract at 162.00 or better. This ensures that the client
will receive a price of 162.00 or less in the purchase of the
December Value Line. Traders should note that it is quite possible
that the price of the commodity may hit or even move through the
limit price level specified and yet not be filled on the order.
Although this is not common, the price of the commodity can be
slightly different on different sides of the pit. It is therefore
possible that the floor broker was unable to accomplish the price
level specified. The limit order is always placed under the market
if it is a buy order and above the market if it is a sell order.
It is usually used to initiate positions rather than exit them.
It is particularly useful in trying to initiate trades in illiquid
markets. A limit order is shown in Exhibit 3-5.
first cousin of the limit order is the "fill or kill"
order. This is a limit order that is sent to the pit that must
be executed immediately or it is canceled. In other words, if
the price is not at or below the limit at the time the order is
received, the order is immediately canceled and the client notified.
stop order is a market order when a specified price level is reached.
The stop order is often confused with the limit order. The difference
between a stop order and a limit order is that a stop order is
placed above the market on the buy side and below the market on
the sell side. Traders wishing to buy a contract could use either
the limit or the stop order. If the current price were 155.00,
traders would enter a limit order as "Buy one June NYSE Index
at 154.90 limit" or "Buy one June NYSE Index at 155.10
stop." When the stop level is reached, the stop order becomes
a market order. This means that the actual fill on the order may
be significantly different from the price mentioned in the stop
order. An example of a stop order is shown in Exhibit 3-6.
most common use of limit orders is to enter the market, and the
most common use of stop orders is to protect investors' positions.
Investors usually seek to find the best price before entering
an order. This is why they use the limit order to enter positions.
On the other hand, traders already in positions do not want them
to become losers, and, therefore, as the position moves against
them, they use stop orders to exit a position.
combination of the stop and the limit order is the stop limit
order. With this hybrid, the stop order becomes a market order
when hit, but the price to be entered at must be at the stop level
or better. This is often a difficult order to execute as it means
the price must stay at the stop level or become more advantageous
to be filled. If the price just keeps moving through the stop
level, then the order will not be filled. A stop limit order is
used more for entry than for exit because of this situation.
market if touched (MIT) order is similar to the stop order. A
MIT order is executed as a market order when the price reaches
the level specified in the order. For example, "Buy one March
S&P 500 Index at 125.00 MIT" is a market order when the
market floor's board shows a price of 125.00.
may be limited by time as well as price. Unless otherwise mentioned,
all orders are considered day orders; this means they are canceled
at the end of the trading session if not filled. An alternative
to the day order is the good till canceled (GTC) order. This is
shown in Exhibit 3-7.
Another term for this order is "open order." The GTC
order is considered always in force until either filled or canceled
or until the contract month expires. Brokerage houses are leery
of GTC orders because they have often been in the unfortunate
position of having the order become filled when the client has
forgotten that the order is in and no longer wishes to be in the
position. Most brokers will suggest that traders enter a series
of day orders as this provides a constant reminder that the trader
wishes to initiate a position. Brokerage houses will typically
send a written notification in the mail when their clients enter
time limit order is another order limited by time rather than
price. This can be any type of order but is canceled when a certain
time is reached during the trading session. An example is "Buy
10 June S&P 100 at 168.00 stop, noon."
very popular orders are the market on open (MOO) and the market
on close (MOC) orders. Exhibit 3-8 shows a MOC order. These
are market orders that are executed on the open or close. MOO
will be executed in the first 30 to 60 seconds of trading and
must be within the opening range. A MOC order will be executed
in the last 30 or 60 seconds of trading and must be within the
closing range. Many people believe that the opening and closing
are the most significant prices of a trading session. Academic
theory suggests that these are important because they represent
the accumulated concepts of market participants as they adjust
to overnight factors on the opening or as they try to predict
what may happen overnight on the close. Many technical and mechanical
trading systems use MOO and/or MOC orders. They do this because
the opening and closing prices are recorded, whereas intra-day
prices are often not recorded except when they are the high or
most exchanges, orders initiated within 15 minutes of the opening
or close are on a "not held" basis. This means that
stop and limit orders are not necessarily guaranteed. A floor
broker will try but will not guarantee the fills. For example,
a limit order placed in the middle of the trading session must
be filled at the specified price or better. If the order comes
back at a price worse than specified, then either the floor broker
or brokerage house will correct the problem with the customer.
If the same order was placed within 15 minutes of the open or
close, then the client does not have recourse to the brokerage
house or floor broker and must accept the order fill as received.
use the cancel order to eliminate a previous order. The two types
of cancel orders are the straight cancel order and the cancel
former order. The latter order is also sometimes referred to as
a cancel and replace order. The straight cancel order does exactly
what it saysit cancels the previous order. For example, if an
order had been placed to buy the mini-Value Line contract on a
stop, the trader could cancel the order by telling the broker
to cancel the order. The cancel former order (or cancel and replace
order) cancels the previous order but replaces it with new instructions.
A canceled order is shown in Exhibit 3-9.
relatively rare order is the combination, or contingency, order.
This order specifies two orders mentioned above, or when one price
level is reached in one contract, an order is placed in another
contract. These are relatively rare as few exchanges take them.
final type of order is the spread order. A spread order is an
order for the purchase and sale of two different contracts. The
contracts may be within the same commodity but may not be in the
same month. Alternately, they could be in two separate commodities,
in which case they could be within the same month. A spread order
is entered in terms of the price level that one contract is over
or under the other contract or simply as a market order. Stop
orders used to be acceptable in combination with spread orders
but are now very rare. Two examples of spread orders would be
"Buy one March NYSE index and sell one June NYSE index at
35 points premium the March" and "Buy two September
NYSE index and sell one September Value Line at 950 points premium
the NYSE Index." We will discuss spreads more fully in another
chapter. Exhibit 3-10 is an example of a spread order.
we have described many types of orders, not all orders are taken
at all exchanges. The orders that each exchange accepts are largely
determined by the floor brokers one is dealing with. For example,
the Chicago Board of Trade does not accept spread stop orders
but the Chicago
Mercantile Exchange does. Nonetheless, it is difficult to enter
a spread stop order at the Chicago Mercantile Exchange as there
are few floor brokers who are willing to accept it. Contingency
orders are also accepted by many exchanges but by few brokers.
In the final analysis, it is the floor broker who determines what
orders are accepted or not accepted. Traders should keep in contact
with their brokers to alert them to changes in acceptable orders
for each exchange.
site with useful information about futures orders. They include
which exchanges accept which orders: