Order (Trading)

An order, in trading, is an instruction to buy or sell a specified quantity of a financial instrument, given by an investor to a broker or sent directly to a trading venue. It states what is to be traded, in which direction, how much, and on what conditions of price and time. Every trade on an exchange begins as two orders, one to buy and one to sell, that the market brings together.

The word has other meanings in finance and law, such as a court order or a money order. In markets it refers only to this trading instruction. The kinds of order a venue accepts, and the rules for ranking and matching them, are a central part of market structure, and choosing the right order for a situation is the first practical decision in executing any trade.

• Instrument. The security or contract, identified by its ticker symbol or another code.
• Side. Whether it is a buy order or a sell order. A sale of borrowed shares is flagged as a short sale.
• Quantity. The number of shares or contracts, known as the order size.
• Order type. The condition on price, described below.
• Time in force. How long the order remains valid if it is not filled.
• Account and routing details. Whose order it is, and where it should be sent.

A market order asks for immediate execution at the best price available. It is almost certain to be filled, but the price is not guaranteed and can be poor in a thin or fast-moving market. A limit order sets the worst acceptable price: a maximum for a buyer, a minimum for a seller. It will never trade at a worse price, but it may not trade at all.

A stop order lies dormant until the market reaches a trigger price, and then becomes a market order. It is used to cut a loss on an existing position or to enter when a price breaks through a level. A stop-limit order becomes a limit order when triggered, which controls the price but risks no fill. As an illustration, take a share offered at 50.05. A market order to buy 100 shares fills at about 50.05. A limit order to buy at 49.90 waits in the book until a seller accepts that price. A stop order to sell at 48.00 does nothing unless the price falls to 48.00.

A day order expires at the end of the trading session. A good-till-cancelled order stays active until it is filled or withdrawn, subject to any limit the broker sets. An immediate-or-cancel order fills whatever it can at once and cancels the rest, and a fill-or-kill order must be filled completely at once or not at all.

Further instructions control how the quantity is handled or displayed. An iceberg order shows only part of its size. Linked orders tie several instructions together: a bracket order attaches a profit target and a protective stop to an entry, cancelling one when the other is filled. Exchanges also offer orders that take part only in the opening or closing auction, and orders that peg their price to the best bid or offer.

An order entered by an investor passes first through the broker's systems, where it is checked against the client's funds, position limits and the firm's risk controls. The broker then decides where to send it, a step called order routing, and must seek the best result for the client under the duty of best execution. At the venue, the order is acknowledged and either trades at once against orders already waiting or joins the order book.

From there an order can be filled in full, filled in part, changed or withdrawn. The sender may issue a cancel order or a replace order to alter price or quantity, though a change usually costs the order its place in the queue. Each event generates a message back to the sender. In electronic markets these exchanges of messages follow standard formats, of which the Financial Information eXchange (FIX) protocol, introduced in the early 1990s, is the most widely used. The pairing of buy and sell orders is carried out by the venue's systems through order matching.

A large institutional order is rarely sent to the market whole, because its size would move the price. It is held as a parent order and divided by an execution algorithm into many small child orders, released over time according to a schedule or in response to market conditions. A single decision to buy a million shares may thus produce thousands of orders, cancellations and amendments.

Automated strategies also generate very large numbers of orders that are cancelled without trading, as quotes are updated in response to new information. Regulators require firms to apply pre-trade checks to every order, including limits on price, size and message rate, to prevent erroneous orders from disrupting the market. An order that is mistaken in price or size, of the kind known as a fat finger error, can cause large losses within seconds if such controls fail.