What Is a Limit-On-Close (LOC) Order?
A limit-on-close (LOC) order is a limit order that is designated for execution at the market close. Limit orders control the price that is paid for a security, or what price a security is sold at. The additional "on close" parameter means the order is only executed if the closing price is within the price limit of the order.
Understanding the Limit-On-Close (LOC) Order
A limit-on-close order is a limit order with execution based on the market’s closing price.
Limit orders offer investors the opportunity to set a price for buying and selling securities. This is advantageous over a market order because it allows the investor to control the exact price they pay to purchase a security and the profit they receive from selling a security. On the flip side, a limit order doesn't guarantee execution because the price must meet or be better than the limit order price. A market order has looser parameters but will be executed.
A limit order can either buy or sell shares. A limit buy order means the order will only execute at the limit price or below. For example, if a stock is trading at $50, but a trader wants to buy at $49, they could place a limit buy at $49. The order will only fill if the price falls to $49 or below. Orders can be partially or fully filled depending on exchange terms and market liquidity.
A limit sell (or short sale) order means the order will only execute at a certain price higher. If the price reaches the limit sell order price, then the order is executed.
Oftentimes, a limit order will be initiated as a good ‘til canceled (GTC) order. LOC orders can't be GTC. They have a limited life and will expire or be executed on the day they are placed.
Limit-On-Close (LOC) Order Terms and Procedures
With a limit-on-close order, an investor controls the price they buy or sell a security at. A LOC order is a limit order that is executed at the market’s closing price. An investor might choose this type of order because they have a strategy that requires they enter a position at the end of the day, for example. They could use a LOC to exit trades as well, but because it is a limit order the order is not guaranteed to fill, which means the position could remain open after the market closes.
A LOC order must be submitted by a specified time, such as 3:50 p.m. on NYSE or 3:58 p.m EST on NASDAQ. LOC orders are submitted and executed on the same trading day. They do not continue to carry over if they are not executed.
A LOC order will only be executed if the closing price matches the limit order price or better. Partial orders may or may not be filled depending on the brokerage and exchange order allowance.
Example of a Limit-On-Close (LOC) Order Placed on the New York Stock Exchange
Assume a trader wants to a buy an NYSE listed stock, like Bank of America Corporation (BAC), at the close today, but they only want to pay up to a certain price and not higher.
They can enter a LOC order prior to 3:50 p.m. EST. If they try to enter an order after that the exchange will reject this order type. They can still manually buy near the close if they wish using a traditional limit order or market order.
The stock is trading at $25.25 at 3:45 p.m.. The trader decides they are willing to buy up to $25.40. They place a LOC buy order for 100 shares $25.40. At 3:50 the order is locked in and can't be canceled.
If the closing price at 4:00 p.m is less than $25.40 the order will execute and the trader will get their 100 shares.
If the closing price is above $25.40, the stock price has exceeded the limit, so the LOC order will not be executed and the trader will not get shares.
Since the order is locked in 10 minutes before the closing price is known, the trader may end up with a much better price than the current price of $25.25, such as $25, or even $24.75, but they will only pay up to $25.40 or whatever limit they set.
The limit they set could also be below the current price of $25.25. For example, they could place it at $25. It will only fill if the closing price is $25 or below.