What Is a Not-Held Order?
A not-held order, usually a market or limit order, gives a broker both time and price discretion to get the best price available. As a result, the broker is not held responsible for any potential losses or missed opportunities that result from their best efforts.
A not-held order may be contrasted with a held order, which instead requires prompt execution for an immediate fill.
- Not-held gives the broker who received an order discretion at both time and price to get the best possible fill for their client.
- Not-held orders are may arrive as market orders or as limit orders.
- Not-held orders absolve the broker from any losses that the shareholder may suffer, and the broker may miss an opportunity because they are waiting for that better price.
Understanding Not-Held Orders
An investor placing a not-held order is trusting that the broker can obtain a better market price than what the investor can get by accessing the market directly on their own. Although the broker has price and time discretion, they are also not responsible for any losses that the shareholder may suffer from this type of order.
Providing the broker tries to obtain the best price for a with discretion order, they are "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. They 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 now can’t execute the order below $16. As it was a with discretion order, the investor has little recourse or grounds to complain.
Not-held orders are most common when trading international equities. The opposite of a not-held order is a held order, which is the order that most investors are more familiar with, and one that demands immediate execution. In other words, the execution of the order remains held with the customer.
When to Use Not-Held Orders
Not-held orders are not typically required in liquid markets since there is ample activity for an investor to get in and out of a position with ease. When a market or security is illiquid or moving erratically, a not-held order may give the investor more peace of mind.
- Illiquid Stocks: not-held orders allow a broker to try for a better price as opposed to executing a market order and paying 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 give their broker a not-held order during periods of high volatility, such as after an earnings announcement, broker downgrade, or a macroeconomic release, such as the U.S. jobs report. The broker or floor trader can then use their experience and judgment from 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 the investor does not want to be executed immediately. For example, 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 they can get before the market closes.
- Limit Not-Held Order: An upper or lower limit is attached to this type of 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 the investor would, ideally, like to buy AAPL at $200, but would prefer not to pay more than that for the stock. The broker, though, has the authority to use their judgment as to whether they fill it at $200, especially if they feel that they can get a better price for the investor. The broker is not held responsible if the order either 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. They may also have other customer orders that they can cross simultaneously.
Limitations of Not-Held Orders
Once the investor gives a not-held order to the broker, they are placing full confidence in that individual 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 a shareholder thinks the broker shouldn't have executed their not-held order before an FOMC interest rate announcement, they cannot seek a rebooking.