What is a Held Order?
A held order is a market order that requires prompt execution for an immediate fill. In most cases, the trader is expected to hit the best offer for buy orders or accept the best bid for sell orders. The opposite order type, a not-held order, provides traders with both time and price discretion to try and get a better fill.
Understanding Held Orders
When filling a held order, traders have very little discretion in finding a price because time is scarce. Typically, they will be required to match the highest bid or lowest offer to facilitate an immediate transaction. For example, if the bid-ask market spread in Apple Inc. is $182.50 / $182.70 and a trader receives a held order to purchase 100 shares, she would place a buy order at the offer price of $182.70, which would be executed immediately under normal market conditions. Held orders are used by investors who need to change their exposure to a particular stock and want their order(s) executed without delay.
When to Use a Held Order
Most investors want to get the best price they can get, but there are two situations where held orders are ideal for:
- Trading Breakouts: A held order could be used to enter the market on a breakout if the trader wants an immediate entry into a stock and is not concerned about slippage costs. Slippage occurs if a market maker alters the spread to their advantage after receiving a market order. In a fast-moving stock, traders are often prepared to pay slippage to ensure they receive an instant fill.
- Closing an Error Position: Traders may place a held order to unwind an error position they want to close immediately to reduce downside risk. For example, an investor may realize he has purchased the wrong stock and would place a held order to quickly reverse the position before he buys the correct security.
When Not to Use a Held Order
One area where it is better to avoid using a held order is when you are dealing in illiquid stocks. Suppose a small cap stock has a wide bid-ask market spread of $1.50 / $2.25. A trader who uses a held order is forced to pay the 33.3% spread ($0.75 / $2.25) to get prompt execution. In this instance, the trader may get a better price if he uses discretion and sits at the top of the bid and incrementally increases the order price to entice a seller out of the woodwork. Of course, the 33.3% spread may be a reasonable price to pay if the trader is playing a breakout or closing a position that was a fat finger error to begin with.