What Does Cancel Former Order (CFO) Mean?

Cancel Former Order (CFO) is a type of trade order that directs a broker to cancel a previously-issued order. CFOs are used by investors who have changed their mind about a previous transaction and wish to change one or more of its parameters, such as the price offered or the amount of securities involved.

CFOs can only be used to cancel transactions that have not yet been executed or filled. Once a transaction has been executed, it becomes a binding contract and cannot be revoked.

Key Takeaways

  • CFO is a trade order given to a broker that cancels a previous trade.
  • It can only be used prior to when the previous trade is executed.
  • CFOs can take time to execute, so investors should be wary to not accidentally duplicate their trades.

Understanding CFOs

CFOs are often used in cases where market conditions are changing rapidly. For instance, in a falling market, the investor may sense that a bargain opportunity is available and issue a CFO to lower the price offered for a security. On the other hand, in a rising market, an investor might feel that their previous order was not sufficiently high to be accepted by the sellers of a particularly popular security. In this scenario, they may need to issue a CFO and modify their order with a higher price.

Modifying Trade Orders

Many online brokerage platforms allow traders to modify their trades as long as those trades have not yet been executed. Rather than using the term CFO, this functionality may simply appear as a "Modify" button in the broker's user interface.

When submitting CFOs, investors must exercise caution and remember that it takes time for electronic trading systems to process and confirm new orders. Therefore, if an investor issues a CFO request and then immediately produces a new order for that same security, it is possible for the second order to be executed before the CFO is processed. In that scenario, an investor might find themselves accidentally duplicating their order; the first and second order might both execute before the CFO. Therefore, it is best to wait until a CFO has been confirmed before placing a new order for that same security.

Real World Example of a CFO

To illustrate, suppose you are an investor wishing to buy 100 shares of XYZ Corporation. You believe its shares are fairly valued at their current market price of $10.25. However, you want to wait until they are a bit less expensive before making your purchase. To accomplish this, you place a limit order to buy 100 shares at a maximum price of $10.00 per share.

In the following days, XYZ issues a surprisingly positive earnings report, and its market price rises to $10.50. You re-evaluate the company and feel that its new earnings report more than justifies its new market price. Consequently, you feel that your previous limit price of $10.00 per share is unnecessarily low.

Eager to buy in at the current market price, you issue a CFO request to cancel your previous order. Once the CFO has been executed, you issue a market order to purchase XYZ shares at their current market price.