Types of Market Orders

Type of order is very important during execution of a trade, as it would lead to unsolicited higher trading cost, if wrong type of order is used. In this text, I will shortly talk about types of market orders.

But foremost, let's shed some light on what is order and it is common properties. An order is an instruction to the market how to execute an order with some criteria. All orders have instrument id, size and if it is a sell or buy. In addition to that, orders have some attached conditions such as limit price, expiry date, market type, market trend and quantity. Lets dive into these types now.

1- Price Related Orders

These orders are executed once some price related criteria are met in order book.

1.1 Market Orders

This is most straightforward order type in which order is executed with available market bid and ask prices. An buy order will be matched with lowest ask price and a sell order will be matched with a highest bid price.

Inpatient traders may give this order to fill their order immediately with some degree of price uncertainty. While it is guaranteed to be executed, the price may move. This order type would have market impact, if big quantity is asked/offered which leads to huge unwanted losses. That order type provides demand and supply liquity to market. Because of spread between bid and ask prices, sequential sell/buy trades cause an immediate loss (ask-bid price). In market orders, sometimes, bid/ask price is improved, if market maker wants to have a priority in order book. Market maker has to improve the ask/bid price if a retail customer is in the order book due to exchange rules.

1.2 Limit Orders

If a trader wants to limit the risk of market move, limit orders can be used. Trader specify a maximum/minimum prices to buy or sell, respectively.In other words, it is the highest buy price and lowest sell price for the trader would be happy to accept. Limit prices are used to minimize cost of market move by making sure execution price is always higher (sell) or lower (buy) than a predefined price.

A limit order can be very aggressive or passive. If limit order is around the market price (marketable limit order), it will be filled quicker than those far away from the bid/ask prices (behind the market). If a limit order is equal the bid/ask prices, then it will be at the market limit order.

Standing limit orders provides option for other traders to trade for free. For example, a sell limit order is an call option for another trader. Similarly, a buy limit order is a put option for other trader. Deepness and structure (symmetric or aysmetric) of a order book in terms of limit orders can be used in trading strategies.

There are two risk in limit order: Execution uncertainty and ex-post regret. If limit order is placed far away from a bid/ask prices, it may not be executed at all. Second risk is that a limit order may be triggered and filled in a short period of time and then move in the same direction. In other words, trader estimates wrong exit point and regret to exit trade earlier.

1.3 Stop Orders

Let say, you want an order get executed once the bid/ask price reach to a a pre-defined price. This order mostly used to stop losses when price moves against their position. For example, a trader may give a sell stop order if the price of a stock drops to a pre-defined lower price (60p) than current price (65p).

Although, stop and limit orders looks like similar, there are different. In limit order, execution price wont be be lower(sell) or higher (buy) than predefined limit. In stop order, once order is triggered, the order is filled with market price. It can be higher or lower than pre-defined stop price.

Stop order is generally used with other order types. For example, with a market order, a trader may put a stop order above of a resistance to buy a stock or below of support point to short a stock.

Stops orders may accelerate price changes. Especially in illiquid markets, if there are lots of asymmetric stop orders, market makers or well informed traders would take advantage of it to trigger sudden huge sell or buy movement to obtain much unavailable stocks (by lowering price) or dumping stocks (by increasing prices). That practice is called tree shaking, and it is applied by market makers time to time to purchase unavailable stocks from public by reducing price of a stock suddenly and triggering stop orders (shake the tree) and then picking up the stocks (apples).

1.4 Limit Stop Orders

If a stop order is used with a limit order, it is called stop-limit order. Trader has to provide two prices in order: Stop price and limit price. Stop price is used for activation and limit price is used to limit cost of market limit. For example, a trader predicts a bull market once a resistance point is passed. But he also wants to limit his exposure to market move. For this one, he would place a stop limit order in which resistance point (maybe slightly higher) as stop price and limit price as 5% of stop price.

1.5 Market-If-Touched Orders

This order type is similar to limit orders with one difference. Once the specified price is touched, it is executed with market price. In that sense, it is similar to stop order but, it is in the opposite direction of current market price. That type of orders are not common, traders mostly use limit orders.

2- Trend Related orders

This type of orders utilise the trend or movement of price. For example, tick sensitive orders uses previous tick price. a previous price is higher than current price then it is a downtick or vice versa uptick. If price do not change between previous and last trade, it is a zerotick. So, an order can be structured in a way that, it is executed only in uptick(or downtick).

Trend related orders are generally used to neutralize market impact. For example, a sell uptick order makes sure, for each sell, another price moves the price up. It wont execute order if price goes up.

Actually, trend related orders are dynamic limit orders. For example, in buy downtick orders, limit price is dynamically adjusted to below difference last price. That type of orders are more effective when the tick size is large. That order type lost its popularity after decimalization of the US stock market in 2000. Tick size was one-sixteenth (6.25cents) before 2000, but it is decreased to 1 cents.

3- Expiry Related Orders

In addition to price related constraints, orders generally includes expiry related conditions, especially for limit and stop orders. These trades generally waits in order book to be matched.

Day orders are valid for the trading day and it is the most common expiry condition. When market is closed, the order expires.

Good-til-cancel (GTC) orders are stays in order book until it is cancelled manually by trader.

Good-until-orders stays in order book until a predefined date or period. Most common periods are week (Good-this-week) and month (Good-this-month).

Fill-or-kill orders are valid only when they are presented to the market. Unfilled part of the order is cancelled immediately.

Good-after-order get activated after a specified time in the order book.

Market-on-open orders are filled only in the opening session of a market which uses market open price.

Market-on-close orders are filled only in the closing session of a market which takes market closing price as basis.

4- Others

4.1 Market-not-Held Orders

Sometimes, a trader would leave trading strategy to the broker or floor specialist, as the broker or specialist is more experienced than trader. Broker comes up with execution plan to minimise trading cost for its client. In this order type, broker does not have legal responsibility to fill order in best prices, unlike market order.

4.2 All-or-None

In this type order, either whole size of requested trade is executed at once or not. A very large trade with a all-or-none order is generally negotiated between traders. As alternative to that, an order can specify minimum accepted quantity.

4.3 Spread Orders

When two different but correlated instrument is traded (sell and buy), a spread order can be used. Since, these instruments are related, there is a spread between them. An order can be constructed buy and sell instruments while the spread between these two instrument do not exceeds (or exceeds) a pre-defined limit.

4.4 Iceberg Orders

A very large order would have very adverse affect on market price if its size displayed on the market. Other traders would take advantage of this condition. To prevent it, display quantity of a large order can be limited to a smaller size, until it is fully filled.

Summary

- Standard order types are used for trading. For example, in FIX protocol, tag 40 (OrdType), following values are expected for an order.

1= Market

2=Limit

3=Stop

4=Stop limit

J=Market If Touched (MIT)

- Market orders executed immediately with current market prices and would cause market impact in large order.

- Limit orders supply liquidity by providing free trading option to other traders.

- While limit and market orders do not stabilize prices, stop orders can be used to destabilize the price.

- Various electronic automated trading strategies (for example iceberg, closing, open, spread) utilise these order types to minimize trading costs.

Below table summarizes types of market order.

Order Type	Usage	Effect on Liquidity	Price Contingencies	Advantages	Disadvantages
Market	Common	Demand immediate liquidity	None	Immediate execution	Uncertain price impact
Standing Limit	Common	Supply liquidity	Hard limit on price, a better or on limit price execution.	Limited price with on market impact	Uncertain execution
Marketable Limit	Common	Supply immediate liquidity	Hard limit on price, a better or on limit price execution.	Limited price impact	Limited price impact
Trend Related	Occasional	Supply liquidity	Must sell on uptrend or buy on downtrend	No price impact, dynamic with market	Uncertain price impact
Stop Market	Occasional	Demands liquidity when it is least available	Triggered when price touches or moves through the stop price;	Used to stop losses	Huge price impact
Stop limit	Rare	Triggered when liquidity is least available; offers liquidity on the side not needed.	Triggered when price touches or moves through the stop price and trade must be at or better than limit price.	Limit price impact upon a trigger	Uncertain execution
Market-if-Touched	Very Rare	Demand immediate liquidity and supplies resiliency	Triggered when price touches or moves through the touch price	Fast execution, upon a trigger	Uncertain price impact