What Is a Market-With-Protection Order?

A market-with-protection order is a semi-specialized type of market order that is canceled and re-submitted as a limit order if the price of an asset moves dramatically after the investor places an order. The limit on the limit order is placed at or around the current market price, as determined by a broker.

This type of order adds a protective measure layer, helping an investor ensure his or her market order will not be completed at a price that is too far off from the market price at the time of the order.

How a Market-With-Protection Order Works

At the most basic level: market-with-protection orders help protect market orders from filling at bad prices due to price slippage in an illiquid or volatile market. More technically, this gets at the material issue with implementation shortfall: that being, the difference between the money return on a notional or paper portfolio where positions are established at the going price when a decision to trade is made and the actual portfolio's return.

In short, a portfolio doesn't always deliver as expected. A certain level of slippage is normal. While most investors understand the explicit costs of executing a portfolio, notably commissions, taxes, and fees.

A far less recognizable but equally devastating implicit cost comes from delay costs (more commonly called slippage) and missed trade opportunity costs. Delay cost arises from the delay between when a decision is made to trade and when an order actually fills. The delay in time often means the price of a security has moved during their period.

A missed trade opportunity cost (often called unrealized profit/loss) reflects the price difference from when a trade is canceled and the original benchmark price based on the amount of the order that was filled. Or in more simple terms: the unrealized profit/loss arising from the failure to execute a trade promptly.

Example of Market-With-Protection Order

For example, let's say you place a market-with-protection order to sell 1,000 shares at the current market price of $45. If half of the order is filled at this price, but the price of the shares start to fall rapidly to $35, the original market order is canceled, and a limit order is placed for the remaining shares at $40.

If the price climbs back to $40, the rest of the shares will fill with a sale order. If there was no protection on the order, the shares might have been sold at $35, which is materially lower than the market price of $45 that the investor originally wanted.