G. Order Instructions (Execution, Validity, Clearing Instructions)

Question 1

Execution Instructions

Answer 1

How to fill orders

Execution instructions specify how to trade. Market orders and limit orders are examples of execution instructions.

Question 2

Validity Instructions

Answer 2

When to fill orders
Validity instructions specify when an order can be filled.

Day orders, good-til-cancelled orders, and stop orders are examples of validity instructions.

Fill or kill is a validity instruction as it indicates when the order can be filled (i.e. immediately or cancel the order)

Question 3

Clearing Instructions

Answer 3

How to settle orders: Clearing instructions indicate how to settle the trade (i.e., how and when to transfer the cash and the security).

Clearing instructions specify how to settle a trade.

Brokers settle retail trades.
Custodians settle institutional trades.

Important: Confirm whether a short sale security can be borrowed against, and whether a long sale can be delivered.

Question 4

Main Execution Instructions

Answer 4

At Market - Immediate at the best price
– Low price when buying, high price when
selling.
At Limit, min execution at sell, max execution at buy but both are best prices.
– Price must be equal or below the specified
limit price when buying and equal or above
the limit when selling.

At limit above best ask or below best bid >indicates the trade as marketable or aggressively price as ‘behind the market’ where execution won’t take place until P is near the limits, otherwise if too far it’s considered “fat from the market”. If limit price is between the bid and ask, we ‘make the market.’
• Display instructions indicate whether
orders should be hidden or displayed and
to whom.

A limit buy order is an execution instruction as it indicates how the order should be filled (e.g. buy at $92 or less)

Question 5

Main Validity Instructions

Answer 5

• Day order: Good during the regular
trading day.
• Good until Cancelled (GTC):
• Good at close; open

• Immediate or Cancel (IOC) aka Fill-or-Kill —good only
when received
– Fill immediately to the extent possible,
then cancel the remainder.
• Stop orders: Do not execute unless the price has been met. aka stop - loss - used to prevent losses or to protect profits.
– Often used to stop losses.

Stop buy - entered w/ a stop trigger above the current market price. Uses: To limit short-loss, to purch at a % above price where an investor believes the stock is undervalued to.

An order placed to protect a short position is called a stop loss buy: A short position profits from declines in stock price and experiences losses as the price rises. A stop loss buy is a limit order that is placed above the market price. When the stock price reaches the stop price, the limit order is executed curtailing further loses.

Stop loss sell orders are: placed to protect the gains on a long position. Stop loss sell orders are limit sell orders that are placed below market price. When the share price drops to the designated price, a sell order is executed protecting the investor from further declines.

When the price begins to fall, use GTC or Stop Sell

Question 6

Bid price, Ask Price or Offer, Bid-Ask spread

Answer 6

Bid Price - What the dealer buys at

Ask or Offer - What the dealer sells at

Bid - Ask spread - The dealers compensation

Liquid securities have lower Bid-Ask spreads, thus lower transaction costs for investors.

Traders who post bids and offers make a market. Traders who take the posted bids and offers ‘take the market.’

Question 7

All of Nothing Orders (Concern the volume of the trade)

Answer 7

Execution only if the whole order can be filled.

Question 8

Hidden Orders (concern the specified visibility)

Answer 8

Only the broker or exchange known the trade size. Useful for non-disclosure of trade execution.

Display size orders, aka Iceberg orders - a peek into the volume.