What is a held order?
A held order is a market order that requires quick execution for immediate fulfillment. In most cases, the trade is expected to be executed with the best offer for buy orders or with the best offer for sell orders. Market orders are a common example of held orders.
This can be contrasted with a non-held order, which gives brokers time and price discretion in trying to get better fulfillment for a client.
- A held order is delivered to a broker for quick execution and immediate fulfillment, as with a market order.
- The benefit of a held order is that the client will be sure that they have executed the full size of their order, be it a buy or a sale, without delay.
- An un-held order, on the other hand, gives the broker some discretion to work the order and try to find a better price, but these efforts may fail.
Understanding held orders
When completing a held order, merchants have very little discretion in finding a price because time is short. Typically, they will be asked to match either the highest bid or the lowest bid to facilitate an immediate transaction.
For example, if the bid-ask market spread at Apple Inc. is $ 182.50 / $ 182.70 and a trader receives a held order to buy 100 shares, they would place a buy order at the bid price of $ 182.70, which would be executed immediately under normal conditions. market conditions.
Held orders are used by investors who need to change their exposure to a particular stock and want their orders to be filled without delay.
When to use a held order
Most investors want to get the best possible price, but there are two situations for which held orders are ideal:
- Business breaks: A held order could be used to enter the market on a breakout if the trader wants immediate entry into a stock and is not concerned about slippage costs. Slippage occurs if a market maker alters the spread in their favor after receiving a market order. In fast-moving stock, traders are often prepared to pay the slip to ensure they receive instant fill.
- Close an error position: Traders can place a held order to undo an error position that they want to close immediately to reduce downside risk. For example, an investor may realize that they have bought the wrong shares and would place a held order to quickly reverse the position before buying the correct security.
- Coverage: If a trader is participating in a hedged order, hedging should be completed as soon as possible after the initial position is established so that the price of the hedging instrument does not change so that it is no longer an effective hedge.
When Not use a held order
One area where it is best to avoid using a held order is when dealing with illiquid stocks. Suppose a small-cap stock has a wide bid-ask market spread of $ 1.50 / $ 2.25. A trader using a held order is forced to pay the 33.3% spread ($ 0.75 / $ 2.25) to get a quick execution. In this case, the merchant can get a better price by using discretion and sitting on top of the offer and gradually increasing the order price to attract a seller outside of the woodwork.
Of course, the 33.3% spread can be a reasonable price to pay if the trader is playing a breakout or closing a position that was a big toe mistake to begin with.