What is a 'Discretionary Order'

A discretionary order is a conditional order placed with some latitude for execution. Discretionary orders help to improve the chances of order execution while still also allowing the investor to place certain conditional constraints.

BREAKING DOWN 'Discretionary Order'

Discretionary orders can broaden the specification of standard types of conditional orders to give an order a higher likelihood of execution.

Discretionary Order Terms and Procedures

Standard types of conditional orders can include an additional discretionary component. The discretionary component is commonly added to limit orders and stop loss orders. The discretionary component is a basic order provision that allows the investor to include a discretionary amount with their order.

Discretionary orders can be placed through electronic trading systems or with a broker. In either case the investor specifies with a broker-dealer a conditional order with a discretionary amount. The discretionary amount is typically quoted in cents and gives the order some additional latitude for being executed beyond the standard conditions. These orders are viewed as special orders by broker-dealers who monitor them for submission. Broker-dealers will seek to submit orders based on the best price for the customer.

Discretionary orders are subject to broker-dealer allowances. If offered they can usually be added to all types of orders. In some cases an investor may add a discretionary amount to a single day order. Discretionary amounts can also be added to good until canceled orders which remain open indefinitely unless canceled by the investor.

Discretionary Order Examples

Many investors choose to add a discretionary amount to standard buy and sell limit orders. Limit orders are the most basic type of conditional order allowing an investor to choose a specified price for which they seek to buy or sell a security. Buy limit order prices will be below the market price and sell limit orders are above the market price.

In a discretionary buy limit order an investor would specify a below market price for execution. This investor would also specify a discretionary amount either through their trading system or with their broker directly. If an investor placed a buy limit order of $20 on a stock priced at $22 with a 10 cent discretionary amount then it means they seek to buy the security at $20 but would permit a buy order price of $20 to $20.10. If the price falls to $20.10 this order would be submitted and executed for the investor.

In a discretionary sell limit order an investor would specify an above market price for execution. This investor would also specify a discretionary amount with their order. If an investor places a sell order at $24 on a stock trading at $22 with a 10 cent discretionary amount then the order could be submitted and executed at a selling price of $23.90 or higher.

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