What Is a Not-Held Order?
A not-held order gives a broker the time and price discretion to seek the best price available. The broker is not held responsible for any potential losses or missed opportunities that result from their best efforts. A held order, in contrast, requires immediate execution.
The not-held order is usually a market or limit order.
- An investor may place a not-held order in hopes of obtaining a better price than could be obtained with an immediate transaction.
- The not-held gives the broker time to aim for the best possible fill for the client.
- Not-held orders may be placed as market orders or limit orders.
- Not-held orders absolve the broker from any losses that the shareholder may suffer if the broker misses an opportunity while waiting for a better price.
Understanding the Not-Held Order
An investor placing a not-held order is trusting that the broker can obtain a better market price than the investor can get by accessing the market directly. The broker has price and time discretion, but may not be held responsible for any losses due to a missed opportunity.
This order is also known as a discretionary or "with discretion" order.
The broker is "not held" liable for failing to execute a trade above or below an attached limit price. For example, a broker may have received a with discretion order to buy 1,000 shares of ABC with an upper limit of $16. The broker might think the market is about to fall and will not buy the stock when it is trading below $16. Instead, the market rallies and the broker can’t execute the order below $16. Since it was a not-held order, the investor has no recourse or grounds to complain.
Not-held orders are most common when trading international equities.
The orders that most investors place most of the time are held orders. That is, they require immediate execution at the current market price.
When to Use Not-Held Orders
Not-held orders are not widely used in liquid markets since the volume of activity gives the investor ample opportunity to get in and out of a position with ease.
When a market or security is illiquid or moves erratically, a not-held order may give the investor more peace of mind.
- Illiquid Stocks: A not-held order allows a broker to try for a better price than might be achieved when forced to place an immediate order and pay a wide bid-ask spread. For example, if the best bid in XYZ is $0.20 and the lowest offer is $0.30, the broker could initially sit at the top of the bid at $0.21 and incrementally increase the order’s price with the hope of not having to pay the much higher offer price.
- Periods of Increased Volatility: An investor may opt for a not-held order during a period of high volatility, such as after an earnings announcement, a broker downgrade, or a macroeconomic release, such as the U.S. jobs report. Brokers use their judgment based on similar events in the past to determine the best time and price to execute the order.
Types of Not-Held Orders
- Market Not-Held Order: This is a market order that expires at the end of the trading day. An investor might give the broker a market not-held order to buy 1,000 Apple (AAPL) with an instruction to execute the order at the best price available before the market closes.
- Limit Not-Held Order: An upper or lower limit is attached to the not-held order, but the broker is given discretion in executing it even if the market trades at the limit price. For instance, a broker may receive a limit not-held order to buy 1,000 AAPL with an upper limit price of $200. This means that the investor would, ideally, like to buy AAPL at $200, but would prefer not to pay more than that. The broker, though, may not fill the order at $200 if that price seems too high at the time. The broker is not held responsible if the order does not get executed or gets executed at a price other than what the investor indicated.
Benefits of Not-Held Orders
Brokers have the benefit of seeing order flows and trading patterns, which often gives them an edge when determining the best price and time to execute a customer’s order. For example, a broker may notice a recurring spike in volume on the buy-side of the order book that suggests a stock’s price is likely to continue rising. This would result in the broker executing a client’s not-held order sooner rather than later.
Limitations of Not-Held Orders
The investor who gives a not-held order to a broker is placing full confidence in that broker to execute the trade at the best possible price. The investor cannot dispute the trade execution, provided that the broker met all regulatory requirements.
For instance, if an investor thinks the broker shouldn't have executed the not-held order before an FOMC interest rate announcement, the investor cannot seek a rebooking.