Types of Orders - Olympus Futures

TYPES OF FUTURES ORDERS

There are many different types of orders that may be entered for trading futures and futures options. Each type of order is a compact communication that indicates how the transaction is to be handled, in particular the specific price and other trade conditions that apply. Each order type has uses that fit a trader’s needs and market circumstances, although not all order types are valid on all exchanges or are accepted by ail brokers, and each exchange may have its own conventions. Keep in mind, however, that any viable order may be used to establish or offset positions, including short sales.

Market Order

Example: BUY 1 March T-bond MKT
Example: SELL 5 July crude oil MKT

Market orders are executed at the best possible price immediately following the time they are received by a floor broker on the trading floor. A market order to buy, such as the one above, would be executed at the prevailing offer; the floor broker would find a counterparty in this case a willing seller, as evidenced by a valid open outcry offer. A market order to sell would be executed, or filled, at the prevailing bid, because that is the price ready buyers are willing to pay.

There are very few circumstances under which a market order could not be executed. One might be if the order was entered to the trading floor very near the closing time of the market. Another might be if a market order to buy for instance, was entered when the market was limit-up. In this case, there may be no valid offers, or ready sellers, to satisfy the demand at the limit-up price.

Limit Order

Example: BUY 20 Sep Yen .7927
Example: SELL 3 July Cocoa 1910

A limit order states the worst price the trader will accept on the transaction. It is understood that the trader will accept a better price if the floor broker can execute the trade at such a price. Although the word “LIMIT” is not written in the examples above, it is understood that these are limit orders when the specific prices are stated. A limit order will sometimes be written as ‘Or Better” or “OB,” such as “BUY 20 Sep.Yen .7927 OB.” This avoids any confusion that might arise between a limit order and a stop order, which is explained below.

A limit order to buy, therefore, states the highest price the trader will pay for the contract; the highest price for a buyer is the worst price. Buy limit orders may be filled only at the limit price or below. A buy limit is entered with a limit price below the current market, indicating that the buying is to be done if the market comes down to the limit.

A limit order to sell states the lowest price the trader will accept for sale of the contract. Sell limit orders may be filled only at the limit price or above. A sell limit is entered with a limit price above the current market, indicating that the selling is to be done if the market rises to the limit. If the market never moves to the price specified in a limit order, the floor broker will report this by saying that the order was “unable”

Stop Order

Example: SELL l5 Apr Unleaded Gas .8308 Stop
Example: BUY 50 Dec. S&P 500920.10 Stop

A stop order is an order to buy or sell at the market, but only after the specified stop price is reached. The prices in the examples above are not limits, but instead they are trigger prices, if and when the specified price is reached or exceeded, the floor broker treats the order as a market order.

A sell-stop order is placed below the present market; It becomes a market order only when the contract trades, or is offered, at or below the stop price.

A buy-stop order is placed above the present market; It becomes a market order only when the contract trades, or is bid, at or above the stop price, if either of these things happens, then the stop order becomes a market order in the hands of a floor broker and is filled immediately thereafter at the best possible price.

Understand that the execution of a stop order is not limited to the trigger price. Such an order may be executed at any price above or below the stop price—whatever the market price is—after the stop order is activated. Stop orders are often used to limit losses on long futures positions (a sell-stop order) or short futures positions (a buy-stop order). Stop orders also are used by some traders to initiate long or short positions when the market penetrates key support or resistance points.

It is important to be aware that the protection intended by placing a stop order may be largely illusory. Serious losses—well beyond those envisioned in selection of the stop price—may still result in fast-moving markets. Care must be taken not to rely on stop orders in markets where prices are gapping as it is very difficult, if not impossible, to fill a stop order at, or even near, the stop price in such circumstances.

Market-if-Touched (MIT Order)

Example: SELL 10 Dec Copper 78.31 MIT

A market-if-touched order is an order to buy or sell at the market, but only after the specified MIT price is reached. The price in the example above is not a limit, but instead it is a trigger price, if and when the price level is reached, the floor broker treats the order as a market order. This description sounds much like that of a stop order, because the mechanics of an MIT order are very similar to a stop order: a price is used to trigger a market order. The key difference is that a market-if- touched order to buy is placed below the current market, unlike a buy stop, and a market-if-touched order to sell is placed above the current market, unlike a sell stop.

For a trader, the effect of an MIT is to place an order similar to a limit but without the firm restriction of the limit price. By using an MIT order, the trader is saying that he is willing to buy or sell at any price once his target is reached; with a limit order, the trader is specified an absolute limit.

As an example, a trader might place a limit order to sell 10 December eurodollar contracts at 96.91; this order would have to be filled at 96.91 or higher, or not at all. Entering the order as “sell 10 December eurodollars at 96.91 MIT’ means the order can be filled at any price after 96.91 trades. This may make it easier for the floor broker to execute the trade but also may result in a price lower than 96.91.

Stop-Limit Order

Example: BUY 5 July Copper 18.05 Stop Limit
Example: SELL 5 Jan Soybeans 612 Stop 611½ Limit

A stop-limit order is used in much the same way as a regular stop order except that its execution is restricted to the limit price or better. In the first example above, if July copper trades or is bid at or above 78.05 ,the stop-limit order becomes effective. At that point, the floor broker with the order in hand must try to buy five contracts of July copper at 7&05 or less. He may not pay more.

In the second example, if January soybeans trade or are offered at or below 612 cents per bushel, the sell stop- limit order becomes effective. At that point the floor broker with the order must sell 5 January soybeans at the market, provided he can do so at a price not lower than 611 /2, the limit price.

Stop-limit orders do not have the potential to set off a domino effect on the market, in contrast to the presence of large numbers of regular stop orders. On the other hand, because the stop-limit order becomes a limit order and not a market order, it may not be possible for a broker, in a fast-moving market, to execute a stop-limit order. Thus, the trade-off between stop-limit orders and regular stop orders is that the latter provides a greater assurance of getting the trade done at the cost of getting an unfavorable price.

Closing Only Orders: Market-on-Close (MDC) Order and Stop-Close-Only Order

Example: BUY 100 Jun 1-bands MKT on Close (MOC)
Example: SELL 20 Jun Gold 292.50 Stop Close Only

Some orders, most commonly market orders and stop orders, may be entered with the explicit instruction that they are executed, prices permitting, only during the official closing period for that market. Although a market-on-close (MOC) order such as the first one above assures the trader that the trade will be executed at the end of the session, the actual execution price on such an order need not be that of the exact last sale that took place, Just as long as the execution fills within the range of closing prices during the official closing period of that contract month. The trader may feel that the closing range will reflect more favorable prices than those trading during the session, or that he wants to execute the trade that day regardless of what the closing range might be.

Stop-close-only orders also are executed only during the official closing period, and they also are triggered only during the closing period, in the example above, the gold futures contracts would be sold at the market, during the close, if June gold trades or is offered at or below 292.50 during the close. While June gold could be significantly below 292,50 by the time the market closes, the prices traded during the session before the close are irrelevant to the stop-close-only order.

Opening (OPU) Only Order

Example: BUY 10 July Corn 250 OPG Only

An opening only order is canceled immediately following the opening if the floor broker is unable to execute it during the official opening of trading in that contract. The actual execution need not be at the price of the first trade exactly. Just as long as it fills within the range of prices recorded during the official opening of the delivery month involved. In this example, the order is a limit order that could be executed only if July corn was offered at 250 or lower during the opening.

Discretionary Order

Example: BUY 10 March Canadian Dollar .6454 with 5 pts. Disc.

Such an order may be executed by a floor broker as high as .6459 or at any price lower than .6459. In the case of a discretionary buy order, the amount of discretion given is above the specified price, while in the case of a sell order the discretion is given below the specified price.

In practice, a floor broker will generally fill any order as quickly as possible within the strict instructions of the order. Therefore, an order such as this one is used primarily in less liquid markets or thinly traded contract months in which the floor broker may have to “work” the order. This order also may be entered “not held,” as discussed below.

Not-Held (NH) Order

Example: SELL 3 July Sugar 6.90 Not Held
Example: BUY 10 March Canadian Collar .6454 with 5 pts. Disc. Not Held

An order entered not held lets the floor broker know that the customer recognizes some circumstance that may make the execution of this order difficult, or that the customer is asking the floor broker to make some extra effort. The not-held order lets the floor broker know that he will not be held accountable if the extra effort is unsuccessful or otherwise not to the customer’s liking. Certain orders that require particular care will be accepted by a floor broker only if they are marked not held when entered, assuring the floor broker that the customer knows that the transactions may not be made precisely as planned.

Fill-or-Kill (FOK) Order

Example: SELL 5 Sep Coffee 72.50 Fill or Kill

A fill-or-kill order instructs a floor broker that the order must be executed immediately or canceled. An FOK order can be filled either in whole or in part, but a report on the part executed must come back immediately and the balance canceled. Different exchanges have different procedures for FOK orders. Some exchanges, for instance, require an FOK to be bid or offered three consecutive times; any contracts not filled after the third try are canceled.

Scale Order

Example: BUY 10 July Cotton MKT and 10 Each 20 pt Lower, Total 100

Scale orders are used to put on a large position in increments. In this instance, the floor broker will buy 10 contracts at the market and treat the balance of the order as a series of limit orders until a total of 100 contracts have been purchased. This order also could have been entered with a limit price, e.g., 60.00, for the first part of the order instead of ”MKT.”

Spread Order

Example: Spread BUY 50 July Crude Oil
SELL 50 Dec Crude Oil, .60 Premium Dec OB
Example: Spread BUY 5 May Corn
SELL 5 May Soybeans, 2.90 Premium Soybeans OB

A spread is a position containing simultaneous long and short positions in the same or related futures markets. A spread order is used to establish, or offset, both the long and short components (or legs) of the spread position with a single order.

The first example is an order for an intramarket, or inter delivery spread: each leg of the spread is in a different delivery month of the same futures market. This is the most popular type of spread. The second example is an order for an intercommodity spread: each leg is in a different, although related, market.

In these examples, the “premium” or higher price of one leg of the spread over the other is specified. A spread order also can be placed “at the market”. To avoid possible errors, the buy side of each spread order should be written first, and it is necessary to precede the command portion of each such order with the word Spread. Note also the designation “OB” which stands for “or better”.

Switch Order

Example: Switch BUY 2 Jun Gold
SELL 2 Apr Gold, 2.90 Premium June OB

A switch order is used to move an existing futures position from one delivery month to another. In appearance and in handling on the floor, such an order closely resembles a spread order. Using the designation “switch” instead of “spread” is primarily an aid to the brokerage house’s own operations department, informing them that one side of the trade is a new position and the other is an offset.

Exchange for Physicals (EFP) or Against Actuals (AA) Order

Example: SELL 500 May Cotton #262.29 ax-Pit to ABC Company vs. Cash

An exchange for physicals (EFP’) is a pre-arranged trade involving a cash transaction in addition to a futures transaction. As such, an EFF often involves hedgers who are completing a cash deal and setting, or removing, their futures hedges at the same time. Unlike other futures trades, an EFP may be sent to an exchange trading floor as a completed trade for posting and does not require pricing by open outcry in the trading pit.

Cancel (CXL) Order

Example: Cancel SELL 25 Jan Soybeans 592, Order # 121 Entered Today

Any order that may be entered also may be canceled if it has not already been executed. In the example above, the order is an instruction to the floor broker not to execute order #121. The cancellation is only confirmed when the floor broker reports back “you’re out.” If the order has been filled already the floor broker reports “too late to cancel” and the trade Is the responsibility of the customer. The floor broker is not liable for his inability to cancel an order once it has been filled.

Cancel Former Order (CFD) or Cancel and Replace Order

Example: SELL 35 Jan No.2 Heating Oil, .6850 GTC, CEO
SELL 50 Jan No.2 Heating Oil, NY .6850 GTC entered (date)
Example: BUY 10 Apr Platinum MKC CEO
BUY 10 Apr Platinum 658.00

A CFO or cancel and replace order is used when a customer wishes to modify an order currently in the floor broker’s hand or replace it with a new order. It may be apparent that the customer could simply cancel the old order, with a cancel as above, and enter a new order. However, this might lead to a situation in which both orders are executed. By combining the cancellation and the new order into one order, the customer is assured that if the old order has been filled, the new one will not be entered at all; If the old one can still be canceled, then the new order will take its place.

In the first example, the quantity to be sold is being changed. In the second example, the order is to buy the April platinum at the market instead of the 658 limit.

If any or all of the contracts already have been bought at 658.00, that number of contracts will not then be bought at the market. This prevents any duplication of the quantity bought.

One Cancels the Other (OCO) Order

Example: BUY 50 March Euro FX 1.0120 or MOC OCO
Example: SELL 10 Apr Live Cattle 68.50 Stop or 70.25 Like OCO

An OCO order combines two instructions into a single order and notifies the floor broker that if either of the two individual instructions is executed, the other is to be canceled automatically. The first order above directs the broker to buy 50 March Euro FX at 1.0120, a limit order. In the event that the broker is unable to fill the order at 1.0120 or lower during the trading day, he is instructed to buy 50 March Euro FX at the market during the official closing period of trading. If the contracts were bought at 1.0120 or lower during the day, the MOC portion of the OCO would not be activated.

The second order gives the floor broker a sell stop order and a sell limit order at the same time. When this order was entered, it can be assumed that April live cat the was trading between 68.50 and 70.25.Therefore, the sell stop would be triggered by a drop in price, and the sell limit would be executed If there were a rally and the sale price Is the limit price or better. As In the previous example, the floor broker would cancel the remaining order following the execution of the other.