What is With Discretion
With discretion is a term that refers to an order type executed by a floor broker according to his or her best judgment. A with discretion order allows for greater customization and flexibility to try and achieve the best price for the trade. Brokers may also refer to a with discretion order as a "not-held order," which gives price and time discretion.
BREAKING DOWN With Discretion
A with discretion order is often beneficial to the investor because it allows brokers to consider the momentum and mood of the trading floor and act on it as they see fit. For example, say an investor places a with discretion order to purchase 500 shares of ABC with an upper limit of $16. The broker may have noticed a pattern of the stock recently opening below $16 and closing above $16. Therefore, the broker may decide to buy the stock on the market open.
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. He or she 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 cannot seek a trade booking.
Other Times to Use With Discretion Orders
Illiquid Stocks: With discretion 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 0.33% spread ($0.10 / $0.30).
Periods of Increased Volatility: An investor may give his or her broker a with discretion 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. Floor traders can then use their experience and judgment from similar events in the past to determine the best time and price to execute the order. (See also: Introduction to Order Types.)