What Is a Contingency Order?
A contingency order is one that is executed only when certain conditions related to the security being traded, or relating to another specified security, have been fulfilled. Such prerequisite conditions range in scope and depth.
In a simple case, a contingency order may depend on the potential purchaser's ability to sell a different security in his or her portfolio to free the funds to make the purchase. In a more complicated situation, an options contingency order's execution may depend on the share price of the options' underlying stock.
How a Contingency Order Works
A contingency order entails several different order types that will only execute after certain conditions have been met. The order is contingent on a factor or set of factors executing.
Examples of Contingency Orders
Perhaps the simplest form of contingency order is a limit order. This specifies that an order will only be executed at (or better than) a certain specified limit price. For a buy limit order, this will represent some pre-determined minimum price, and for a sell limit order a pre-determined maximum. Actual orders may be filled better than the limits, either below the minimum or above the maximum, respectively - but never worse than the contingent limits.
A stop, or stop-loss order can also be viewed as a contingency order because it does not become a market order until the price of the stock being sold reaches a predetermined price. This type of order is very useful when applied to the sale or purchase of options, as well as establishing downside protection in stock positions to exit during a bear market. Other modifications to stop orders can also be included such as a trailing stop.
An all or none (AON) order is an order that executes contingent on getting the full order size executed at once. If a trader wants to buy 10,000 shares of XYZ 'all or none', then he or she would refuse an execution of anything less than the full 10,000 shares.
An immediate or cancel (IOC) order is one that is contingent on being executed immediately. If an order cannot be filled in whole or in part within a very short period of time it is canceled. Say a trader wants to buy 10,000 shares of XYZ stock for a limit price of $20.00 and specified immediate or cancel. If the offer (ask) size at $20.00 is only for 2,500 shares, other sellers will have to come in. But since it is designated IOC, only the 2,500 shares may end up trading.
A fill or kill (FOK) order is one that combines both contingencies of all or none and immediate or cancel. Therefore, the order above would only be executed if all 10,000 shares could be filled in a very short period of time.
Other contingency orders also exist such as a day order, which is a limit or stop order that expires at the end of the trading day. Other orders specify to buy the market price on the open (MOO) or the market on close (MOC), which can also be specified as limit orders instead of at the market.