What is Scale Order
A scale order is a type of order that comprises several limit orders at incrementally increasing or decreasing prices. If it is a buy scale order, the limit orders will decrease in price, triggering buys at lower prices as the price starts to fall. With a sell order, the limit orders will increase in price, allowing the trader to take advantage of increasing prices, thereby locking in higher returns.
BREAKING DOWN Scale Order
Traders often use scale orders as a strategy for buying or selling large blocks of securities, which could be subject to extra price volatility as the market reacts to the volume of the transaction if the whole block was bought or sold in a single market transaction. Scale orders allow traders to split a larger transaction into smaller volumes, which limits the bad aspects of market volatility and protects profits. Generally, scale orders fall into two broad categories:
- Buy Scale Orders: A series of limit orders with decreasing prices. Each order in the series is triggered as the price of the security declines.
- Sell Scale Orders: A series of limit orders with increasing prices. Each order in the series is triggered as the price of the security increases.
If a trader believes that a stock will fall over the course of the day, a scale order will help him or her take advantage of the lower price if the prediction is correct. If the trader wants to purchase 1,000 shares of the company, he or she may scale the limit orders so that 100 shares are bought for every $0.50 fall in price.
Example of How Scale Orders Work
Consider a trader that would like to sell 10,000 shares of Company XYZ. However, with such a large block of shares, a relatively large block trade could result in a sharp drop in the price of the company's stock. The current market price of the stock is $20.25 per share. Therefore, instead of placing one large order, the trader places a good-til-canceled sell scale order, with the following instructions:
Total Order Size = 10,000 shares
Scale Order Size = 1,000 shares
Scale Price Increment = $0.01
Starting Price = $20.25
NBBO = $20.23 - $20.27
If the price of Company XYZ's stock falls to $20.25, 1,000 shares will be sold. The stock's price must then drop to $20.24 before the next 1,000 shares are sold. This continues until the order is canceled or the price of the stock drops to $20.15, at which point all of the orders would have been executed.