With definition of discretion

What about discretion?

Discretion is a term that allows a client’s order to be executed by a broker or trader according to their best judgment. An order with discretion allows greater customization and flexibility to try to achieve the best price for the trade. Some financial advisors may have discretionary accounts on behalf of their clients, where almost all business activity within them occurs with discretion.

Brokers can also refer to an order with discretion as an “un-held order”, which grants discretion over price and timing. As a result, the broker is not responsible for potential losses or missed opportunities that result from its best efforts.

Key takeaways

  • A discrete order allows the broker a certain degree of flexibility on how and when to execute the order.
  • This type of order is used if the investor feels that the broker can get a better price than he could get with a market order.
  • With discretion, orders do not always result in a better price, and the broker may miss an opportunity because he takes a risk trying to get a better price.

Understand with discretion

A discretionary order can be beneficial to an investor because it allows traders to consider the momentum and mood of the trading floor and act accordingly as they see fit. A discretionary order is also called a discretionary order. For example, suppose an investor places a discretionary order to buy 500 shares of ABC with a limit of $ 16. The broker may have noticed a pattern of the stock that recently opened below $ 16 and closed above $ 16. Therefore, the broker may decide to buy the shares on the open market.

As long as the broker tries to obtain the best price for an order with discretion, he is not responsible for not executing a trade above or below an attached limit price. For example, a broker may have received a discretionary order to buy 1,000 shares of ABC with a limit of $ 16. They might think that the market is about to fall and will not buy the shares when it is trading below $ 16. Instead , the market recovers and the broker is now unable to execute the order below $ 16. As this was a discrete order, the investor has little recourse or reason to complain.

Other times to use with discretionary orders

Discretionary orders are not usually necessary in liquid markets, as there is extensive activity for an investor to enter and exit a position with ease. When a market or security is illiquid or moving erratically, a discrete order can provide the investor with more peace of mind.

  • Illiquid stocks: Discretionary orders allow a broker to try to get a better price instead of executing a market order and paying a large bid and ask spread. For example, if the best bid on XYZ is $ 0.20 and the lowest bid is $ 0.30, the broker might initially sit on top of the bid at $ 0.21 and gradually increase the order bid in hopes of not having to pay the much higher bid price. .
  • Periods of higher volatility: An investor may give their broker a discretionary order during periods of high volatility, such as after an earnings announcement, a broker’s rating downgrade, or a macroeconomic release, such as the US employment report. floor can use its experience and judgment of similar events in the past to determine the best time and price to execute the order.

How to order discreetly

Most online brokers and / or discount brokers do not provide discretionary orders as it requires a broker or floor trader to manually execute the trade. Manually executed trades are usually much more expensive than orders placed online, which do not require the broker to do anything physically.

Placing a discretionary order generally requires physically calling the broker and requesting this type of order. Many brokers and financial institutions charge five to ten times more for a call-in-trade than for an order placed through their online trading platform.

Whether a broker provides discretionary orders will vary. If this type of order is of interest, check with the broker to see if it is available.

Example of a discretionary order to buy a share

Suppose a trader is interested in buying a share of Berkshire Hathaway Inc. (BRK.A), which was last traded at $ 317,000 per share. The average daily volume of the stock is about 250 shares, so it is not very liquid. The spread between the offer price and the offer price can be in the thousands of dollars, so the investor decides to call his broker and place an order with discretion.

The shares range from $ 314,000 to $ 318,000 today, but the investor doesn’t have time to wait for a better price, and they also don’t want to pay even $ 314,000 if the shares are likely to fall later in the day. The investor calls his broker and places a discretionary order that expires in two days and is capped at $ 316,000. This basically says that the broker can complete the buy order at any price below $ 316,000 within the next two days, using his best judgment to get the best possible price.

If the stock continues to rise above $ 317,000, the order will not be filled. On the other hand, if the price drops to $ 315,000, the broker may decide to complete the order. The price may continue to decline or it may rise shortly thereafter. Regardless of the result, the merchant will have to accept the filling (or not filling) that the broker receives them.


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Mark Holland

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