What Is a Market-With-Protection Order?

A market-with-protection order cancels an order to buy or sell stock or other assets and re-submits it as a limit order. A broker might submit a market-with-protection order if the price of the stock has moved unexpectedly and dramatically since the market order was placed. The limit will be set at or near the fair market price, as determined by the trader.

The purpose of a market-with-protection order is to protect the broker from inadvertently completing a transaction at the worst possible time.

  • The market-with-protection order is a strategy for preventing losses caused by volatility in the market.
  • The trader cancels a market order and replaces it with a market-with-protection order in order to ensure a reasonable price.
  • Alternatives include canceling the order altogether or leaving it in place. The latter could mean a big win or a big loss.

How a Market-With-Protection Order Works

Market-with-protection orders help prevent market orders from being filled at prices that are unsustainable. That is, they have suddenly risen or dropped due only to volatility in the market. Their prices can be expected to return to normal, and the broker may have bought or sold at the wrong moment.

The market-with-protection order is conservative at heart. That is, the trader has decided that the urge to obtain the best possible price is at war with the desire to avoid getting the worst possible price. In a time of great price volatility, the trader may opt for safety, accepting a reasonable return that comes at a smaller risk.

Pros and Cons of Market-With-Protection Orders

That move to safety raises the issue of implementation shortfall. That is the difference between the apparent investment return and the return after all of the costs of achieving it are considered. Those costs can include a failure to act on a better price for that investment at some time during the period.

This is an implicit cost beyond the explicit and easily identifiable costs of taxes and fees. Missed trading opportunities are implicit costs, as are the adverse price changes that can occur between a decision to trade and the actual fulfillment of an order. This latter issue is commonly called "slippage."

In the case of a market-with-protection order, the missed trade opportunity cost reflects the difference between the original, unfulfilled, market order price and the revised order price. This is often called unrealized profit or loss.

Some level of slippage is normal. And nobody has the skill or the luck to always buy or sell at the perfect time.

Example of Market-With-Protection Order

Let's say you place a market-with-protection order to sell 1,000 shares of Company X at the current market price of $45. Only half of the order is filled at this price. The shares have started 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 the broker had not canceled the order, the rest of the shares could have sold at $35. The broker got the best price, $45, for half of the shares but obtained only a decent price, $40, for the other half.