Stock Order Execution
Stock Order Execution, Part 2: What
You Should Know
As we mentioned in Part 1,
choosing an appropriate order type - market, limit, stop or stop limit - can
help you control the outcome of your trade.
However, those aren't the only factors that can affect how (or whether)
your order is executed, or the price you get.
Events you may be only
remotely aware of, if at all, can affect the price you get on your trade and
even the likelihood of your order's being filled. These include company news announcements, analysts'
recommendations, and changes in Federal lending rates. These factors have been known to cause such
sharp increases in trading volume of particular stocks that the market loses
its ability to process quote updates and trade information, causing execution
prices to differ from quotes, sometimes alarmingly.
Time and execution
conditions, as well as the size and type of your order and where it happens to
be traded, can also affect the outcome of your trades.
Headlines count
Company news, Wall Street recommendations, interest rate
changes: All have been known to result
in sudden, dramatic increases in the trading volume of particular stocks,
compromising the market's ability to process price updates and trading
information - and causing puzzlement and consternation among investors.
For example, assume that
Ace Trucking announces better than expected earnings after close of
business. This commonly results in
a large number of orders accumulating before the market opens the next
day. Unexpectedly high trading volume
can cause the execution price to differ significantly from the quote.
Or say that several analysts
change their rating on Ace Trucking's outlook during trading hours. As in the previous example, such news can
cause investors to place many more orders than usual to buy (or sell) Ace. Heavy trading can make the market move
faster than its ability to process trades or quotes, so trades may be executed
at a price quite different from the current quote.
In another example,
trading in Ace Trucking is halted owing to the announcement of a planned
merger. When trading is resumed
(generally later that day), orders placed right after or during the halt may be
filled at prices different from the quote, or not at all.
Finally, assume the entire market is down more than 10%
within a short period; in that case,
trading in the entire market is automatically suspended. When the market reopens, prices may be
rather different from what they were before the shutdown.
In addition to the disagreement between the quote and the
price you may get on your trade, unusual market conditions can delay execution,
quote updating and trade confirmation.
Time and execution conditions make a difference
Last time we discussed order type: market, limit, stop and stop-limit orders. The time conditions you place on your trade
can be important as well. A day
order is valid only for the current trading day, and if not filled will
expire at the end of the regular market session. Unless you specify otherwise, any order is considered to be a day
order.
If you don't want to be bothered placing your trade again
tomorrow or the day after, and if you take care to minimize potential surprises
(for example, by specifying a limit order) consider placing a good-till-cancelled
order (GTC may appear on your statement). It will be valid for an extended period of time or until filled.
Execution conditions seem self-explanatory, but really
aren't. Placing them may appear to give
you control over your trade, but in fact can delay processing and even prevent
your order from being filled. This is
not only irritating but can result in losses.
They're best used by highly experienced, highly active traders:
An all-or-none (AON) specification requires the whole
order to be executed and filled at the same time or not at all. This can result in a delay or in no
execution at all if there aren't enough shares available to buy, or enough
demand for shares when selling.
An immediate-or-cancel (IOC) order requires
the broker to immediately fill as much of the order as possible and cancel the
remainder.
If a fill-or-kill (FOK) order is not filled in
full immediately at the specified price, it's canceled.
Partial fills occur from time to time. When there aren't enough shares available to
fill an order all at once at a particular price, the order may be spread over
several similar prices, or purchased in increments at the specified price. Say, for example, you place an order for
5,000 shares of Ace Trucking at $10, and only 3,000 are available at that
moment at that price. Your order may
fill partially for 3,000 shares at $10, and partially for 2000 shares at
$10.05; or the remaining 2000 shares may fill at $10 later in the day. If you placed the entire order at once, you
will (in almost every case) pay only one commission.
Note that specifics, such as for good-till-cancelled orders
(generally good from 30 to 60 days, but check with your broker) can differ from
one brokerage to another. If you have a
question about order type, time, or execution - or anything at all regarding
your trade - never hesitate for a minute to ask your broker about it.
Certain types of glitches may become less common as markets
become increasingly automated and investors more experienced; but they'll never
completely disappear. As with
everything worth doing, the more you know, the fewer surprises you'll have.