Orders And Price Analysis - Orders

Orders and Price Analysis
Of the 120 questions on the Series 3 exam, you can expect around 11 on orders, accounts and price analysis.

Basic Characteristics and Uses of Different Orders
There exists several types of orders that commodities traders use to put on a trade. These orders, in turn, have different features that relate how long they are to be in effect. Either the customers themselves, or agents acting on their behalf, enter orders. Investment in the commodities markets may be direct, as just described, or indirect,t whereby customers may participate in a commodity pool with the counsel of a commodity trading advisor (CTA).

Basic Orders
There are four basic types of securities orders recognized by the NFA.

  1. A "market order" is the default; it is an order to buy or sell securities at the current market price, and it will be filled as long as there is a market for the security. Specific to the terms of this order are the commodity, month of delivery and year, the transaction type (purchase or sale) and execution at the current market price.
  2. A "stop order" is an order to either buy a security at the market price when the price attains or exceeds the stop price - at this point, the stop order becomes active (is elected or triggered) to a certain level - or to sell it at the market price when the price falls to or below a certain level. The order is contingent upon the stop price being reached. Once it is, the broker attempts execution at the best price, in other words, a market order.
    1. Buy stop: the order is placed above the current market price. Once the market price reaches or exceeds this pre-set price, the buy stop is triggered.
    2. Sell stop: the order is placed below the current market price, being activated when the market drop to or below the stop price.
  3. A "limit (price) order" sets the worst price at which an order may be executed for the customer. Execution may be at a better price, but never at one worse than the order specifies. The words "or better" following a specific price will confirm the existence of a limit order.
    1. Buy limit: specifies the highest price that the customer will buy.
    2. Sell limit: specifies the lowest price at which the customer will sell.
  4. A "Stop-Limit order" is a hybrid order with features of both stop and limit orders. Such an order must be triggered at a price equal to or better than the stated limit.
    1. Buy stop-limit: these orders are placed above the market and set to trade equal to or exceeding the stop price. Once the order is affected, it becomes a limit order to purchase the futures contract at a price equal to or less than the limit specified.
    2. Sell stop-limit: the reverse of a buy stop-limit, this type of order is placed at or below the stop price. Once triggered, it becomes a limit order to sell the futures contract at a price equal to or greater than the limit.
  5. A "market-if-touched order (MIT or board order)" is an order to buy or sell futures contracts that is carried out at the first available price after a specified price has been reached. Triggered like a stop order, a board order differs in that it triggers a market order that will be filled, barring a locked limit (no trading).
    1. Buy MIT: trades less than or equal to the stated price set the order in motion, which becomes a market order.
    2. Sell MIT: trades equal to or greater than the stated price set the order in motion, which becomes a market order.

Be able to compare and contrast Stop and Market-if-Touched orders. The main differentiator is where the order is placed relative to the current market price. Buy and sell stops are activated by an order placed above and below the stop price, respectively. With a board order, the opposite is true. Buy MIT orders are placed at or below the stated price and sell at or above the state MIT price. Stop orders do not guarantee execution of a trade, whereas MIT orders usually do, unless there is a locked limit.

Timing Arrangements For Orders

  1. A "good-til-canceled (open) (GTC) order" remains in effect until it is either filled or canceled.
  2. "Day order" must be executed on the day entered or it is canceled.
  3. A "fill-or-kill order" must be executed immediately and in its entirety or else the order is cancelled.
  4. An "At-the-open/At-the-close" order is an order to buy or sell a given number of contracts at or near that day's opening or closing price, essentially in the price range that exists within the first or final minutes of trading. It is essentially an instruction from an investor to a trader to execute the transaction as if it were a regular market order, but with the aforementioned timing stipulations.
  5. Types of Cancel Orders
    1. A "one-cancels-other (OCO) order (or OCO-order cancels order)" stipulates that, if one part of the order is executed, then the other part must be canceled. Used mostly as a tactic to liquidate a position, investors invoke OCO to lock in gains or avoid losses. One example would be a stop order combined with a market-if-touched order. If the position price decreases, a stop order cuts the loss, and the market-if-touched order is cancelled. If the position price increases, the market-if-touched order could capture the gain, and the stop order would be cancelled. This arrangement may be used for a customer who wants either of two orders.
    2. "Straight Cancel" cancels an order that the customer no longer wants.
    3. "Cancel Former Order" or "Cancel/Replace Order (CFO)" stipulates that a newly entered order is to cancel a prior order entered, but yet to be executed.
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