What Is a Firm Order?
A firm order is one that is left open or standing by an investor with their broker. A good-till-canceled (GTC) order is considered a firm order since it will remain open indefinitely.
A firm order may also refer to an order initiated by a proprietary trading desk for their own account, where the order is coming from a firm.
In the business world, a firm order may be one that is non-cancelable. In other words, the parties are expected to follow through with the transaction regardless of extenuating circumstances.
- A firm order in trading is one that is in effect until it has been explicitly canceled, or has met some preconditions that invalidate it.
- A firm order may also refer to a buy or sell order placed on behalf of a financial institution for their own accounts.
- In commerce, a firm order may be a non-cancelable or confirmed order that will not fall through.
Understanding Firm Orders
A proprietary brokerage order is an order to buy or sell a security for a brokerage's internal account. Brokerages may use firm orders to place trades on accounts associated with margin or securities lending. They may also choose to trade in a portfolio for other internal firm purposes. These trades require a trader to be fully authorized by the brokerage before executing the transaction. Shares purchased under this type of firm order are held directly by the brokerage.
Proprietary brokerage orders are treated in the same way as all other orders. They must be tagged with either long, short, or short exempt. These markings are dictated by securities regulation and Regulation SHO. Firm orders for short sale purposes will be flagged with either short or short exempt.
Investor's Firm Orders With Brokers
A firm order from an investor may also be referred to as a good ‘til canceled (GTC) order.
Once an investor places a firm order with GTC instructions, the broker-dealer is not required to obtain further consent from the investor to place the trade. Therefore, a broker-dealer will execute a firm order regardless of the amount of time that has passed.
Open orders may have varying timeframes to expiration. Many open orders will only be live for up to 30 days, after which time the order expires and the investor must place a new trade to keep the order open. The lack of expiration on a GTC or firm order is what separates it from a typical order which expires.
Firm orders can help an investor to obtain a better price, limit losses, or take profits. When placing a firm order, investors have a few options for customization. They can choose a firm buy or sell limit, or a firm buy or sell stop order.
A firm buy limit order indicates the highest price the investor is willing to buy at. A firm sell limit order indicates the lowest price the investor is willing to sell at.
A stop order can also be used to limit losses or to enter a position. A stop-loss order is a sell order at a specified price below the current market price, or above the current price if in a short position. These orders can be used for risk management. All of these orders remain open until executed, assuming they are firm or GTC. A stop order is used to enter a position if the desired long entry price is above the current market price, or the desired short entry price is below the current market price.
Firm orders can be canceled or modified by the investor at any time, but the order will remain open until canceled or filled.
Firm Orders in Business and Commerce
A firm order in the business world is one that cannot be revoked, amended, or canceled. In other words, a firm order is a confirmed order. A firm order confirmation is a notification the order has been received and processed.
The key takeaway is that a firm order for a business is one that is guaranteed to be consummated, posing little to no risk to the company.
Example of a Firm Order in Stock Trading
Assume an investor is interested in buying Apple Inc. (AAPL). The stock is currently trading near $200. The investor really likes the company but thinks she can get a better price by placing a limit order below $200. They decide to place a limit buy order at $170.
The investor makes the order a firm one, or a GTC, because they don't want the order to expire and then forget to put out another one. The investor uses this order type because they are happy to be filled at $170—if the stock drops to that level—one week from now, one year from now, or longer.
Just because the order is GTC or firm doesn't mean the investor can't log into their trading account and cancel or revise the order. GTC just means the order stays out until canceled by the investor, or the order is filled.
If after several months, APPL is trading at a much higher price, the investor may wish to reconsider their limit order price, or they could leave it. Alternatively, if the fundamental position of the company deteriorates, they may wish to lower the limit order or cancel it.