Trading Order Types and Processes
Introduction to Order Types
What are maker-taker fees?
Maker-taker fees refer to the practice of securities exchanges offering market makers rebates and charging market takers fees for executing trades. Market makers are firms that are always ready to buy or sell a given security at the best possible price, making a profit off the ask-bid spread. Market makers enhance the market’s liquidity, thus attracting less active traders (and long-term investors) looking to buy at a reasonable price. Electronic exchanges began offering market maker rebates in the 1990s to draw trading activity from established exchanges with greater liquidity. The exchange makes a small profit on the difference between the fee charged to market takers and the rebate passed to market makers.
Does a stop loss work after hours?
Stop loss orders are generally only executed during regular market hours, which can pose a problem for investors trading securities that gap down or up overnight. A significant drop in a stock’s price could trigger a good-til-canceled stop order that is actually executed at a much lower price than that specified in the stop order. To avoid this problem, you can place a stop-limit order, ensuring the trade will only be executed at a specified price or better.
Are there fees for limit orders?
If your brokerage charges trading fees, a single limit order should incur the same fees as a market order. Fees on limit orders can add up, though, if the trade is executed as more than one order. Say, for example, you want to sell 1,000 shares of X at or above $5. When the price of X reaches $5, your order is sent to be executed, but there aren’t many buyers and only half of your order is executed before the price drops back below $5. The next time the $5 threshold is reached, the remainder of your order is executed, but you’ve been charged for two trades. You can avoid this scenario with “all or none” or “fill or kill” orders, but then you run the risk of the order not executing at all.
Can I place an order that stays open during post-market trading?
Yes, a good-’til-extended-market (GTEM) order will remain open after the end of regular trading hours. A GTEM order allows a trader to act on after-hours news, like a disappointing or unexpectedly good earnings report.
A stop-loss order is an order placed with a broker to either buy or sell a security when it reaches a certain price. Stop-loss orders become market orders when triggered, meaning they do not guarantee that the order will be executed at, below, or above the specified price.
A stop-limit order is like a stop-loss order, which initiates the purchase or sale of a security when it reaches a certain price. But the stop-limit order also stipulates that the trade must be executed at a specified price or better.
Good ‘Til Canceled
Good ’til canceled (GTC) refers to an order that remains open under it is fulfilled, canceled by the trader, or hits the maximum number of days the brokerage will allow an order to stay open.
A trailing stop is a conditional order that initiates a trade at a trailing, variable amount—expressed as a percentage or points—rather than at a fixed price like a regular stop order. Trailing stops are considered good-til-canceled orders. Say you buy stock of Company Y for $10 and set an order to initiate a sale if it drops 10%. Two months later the stock is up to $15. Your original order would have been executed at $9 (90% of $10), but now your trade will be executed at $13.50 (90% of $15).
A one-cancels-the-other (OCO) order refers to a pair of simultaneous orders stipulating that if one order is executed, the other should automatically be canceled. OCO orders can be contrasted with order-sends-order (OSO) conditions, which initiate a series of trades in which the second trade can only be executed after the first.
Fill or Kill
Fill or kill (FOK) is a conditional order instructing a brokerage to execute an order both immediately and completely or not at all. Fill or kill orders are most often used by active traders transacting in a large quantity of stock. An FOK order is essentially an all-or-none (AON) order and an immediate-or-cancel (IOC) order combined.