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November 28, 2022

Stock Order Execution

Stock Order Execution, Part 2:  What You Should Know

As we mentioned in Part 1, choosing an appropriate order type - market, limit, stop or stop limit - can help you control the outcome of your trade.  However, those aren't the only factors that can affect how (or whether) your order is executed, or the price you get.

Events you may be only remotely aware of, if at all, can affect the price you get on your trade and even the likelihood of your order's being filled.  These include company news announcements, analysts' recommendations, and changes in Federal lending rates.  These factors have been known to cause such sharp increases in trading volume of particular stocks that the market loses its ability to process quote updates and trade information, causing execution prices to differ from quotes, sometimes alarmingly.

Time and execution conditions, as well as the size and type of your order and where it happens to be traded, can also affect the outcome of your trades. 

Headlines count

Company news, Wall Street recommendations, interest rate changes:  All have been known to result in sudden, dramatic increases in the trading volume of particular stocks, compromising the market's ability to process price updates and trading information - and causing puzzlement and consternation among investors.

For example, assume that Ace Trucking announces better than expected earnings after close of business.  This commonly results in a large number of orders accumulating before the market opens the next day.  Unexpectedly high trading volume can cause the execution price to differ significantly from the quote.

Or say that several analysts change their rating on Ace Trucking's outlook during trading hours.  As in the previous example, such news can cause investors to place many more orders than usual to buy (or sell) Ace.  Heavy trading can make the market move faster than its ability to process trades or quotes, so trades may be executed at a price quite different from the current quote.

In another example, trading in Ace Trucking is halted owing to the announcement of a planned merger.  When trading is resumed (generally later that day), orders placed right after or during the halt may be filled at prices different from the quote, or not at all.

Finally, assume the entire market is down more than 10% within a short period; in that case,  trading in the entire market is automatically suspended.  When the market reopens, prices may be rather different from what they were before the shutdown.

In addition to the disagreement between the quote and the price you may get on your trade, unusual market conditions can delay execution, quote updating and trade confirmation. 

Time and execution conditions make a difference

Last time we discussed order type:  market, limit, stop and stop-limit orders.  The time conditions you place on your trade can be important as well.  A day order is valid only for the current trading day, and if not filled will expire at the end of the regular market session.  Unless you specify otherwise, any order is considered to be a day order.

If you don't want to be bothered placing your trade again tomorrow or the day after, and if you take care to minimize potential surprises (for example, by specifying a limit order) consider placing a good-till-cancelled order (GTC may appear on your statement).  It will be valid for an extended period of time or until filled.

Execution conditions seem self-explanatory, but really aren't.  Placing them may appear to give you control over your trade, but in fact can delay processing and even prevent your order from being filled.  This is not only irritating but can result in losses.  They're best used by highly experienced, highly active traders:

An all-or-none (AON) specification requires the whole order to be executed and filled at the same time or not at all.  This can result in a delay or in no execution at all if there aren't enough shares available to buy, or enough demand for shares when selling.

An immediate-or-cancel (IOC) order requires the broker to immediately fill as much of the order as possible and cancel the remainder.

If a fill-or-kill (FOK) order is not filled in full immediately at the specified price, it's canceled.

Partial fills occur from time to time.  When there aren't enough shares available to fill an order all at once at a particular price, the order may be spread over several similar prices, or purchased in increments at the specified price.  Say, for example, you place an order for 5,000 shares of Ace Trucking at $10, and only 3,000 are available at that moment at that price.  Your order may fill partially for 3,000 shares at $10, and partially for 2000 shares at $10.05; or the remaining 2000 shares may fill at $10 later in the day.  If you placed the entire order at once, you will (in almost every case) pay only one commission.

Note that specifics, such as for good-till-cancelled orders (generally good from 30 to 60 days, but check with your broker) can differ from one brokerage to another.  If you have a question about order type, time, or execution - or anything at all regarding your trade - never hesitate for a minute to ask your broker about it.

Certain types of glitches may become less common as markets become increasingly automated and investors more experienced; but they'll never completely disappear.  As with everything worth doing, the more you know, the fewer surprises you'll have.

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