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TYPES OF ORDERS

There are two major categories of orders: those in which price is of primary importance, and those in which timing is top priority. Following is a listing of orders in each category:

• Market
• Fill or Kill
• On Open
• On Close
• Good-til-Cancelled
• One Cancels Other

• Stop
• Market-if-touched
• Limit
• Stop limit
• Spread

Time Orders

Market Orders are orders to buy or sell at the best possible price as soon as possible. They are the first orders to be filled at any given price, and are used to enter or exit the market quickly, regardless of the current market price.

Example: Buy 1 Mar. Treasury Bond at the market.

Market orders are generally not used in thin markets, where the fill could be substantially different from the last-traded price.

Fill or Kill Orders (FOK) or Quick orders are (time) limit orders which, if not filled immediately, are cancelled.

On Open Orders are orders to buy or sell in the opening range; i.e., within the range of prices traded during the designated opening period of trading. If an order is placed “on the opening” with no stated price, it will be filled within the opening range.

On Close Orders are orders to buy or sell in the closing range; i.e., within the range of prices traded during the designated closing period.

Good-til-Cancelled (GTC) orders remain on the books until cancelled and can be filled at an undesirable time if forgotten.

One Cancels Other Orders (OCO) One executed order cancels an alternate order. These orders often are used when a price breakout is expected, but the direction of the breakout is uncertain.

Price Orders

Stop Orders are traded only when the market price trades at or “through” the stop price. The following diagram illustrates how stop orders are placed:

90.84 Buy Stop
90.74 Market Price
90.64 Sell Stop

Stop orders may be inappropriate in very thin or choppy markets, and in any case, placement must be varied depending on price volatility.

A Buy Stop Order is placed above the current market price, and is transformed into a market order when the futures price trades or is bid at or above the stop price. A buy stop order can be used to limit losses (a stop loss order) on a short position, or to establish a long position. When a stop loss order is used and the trader’s position is offset due to market movements, the trader is said to have been “stopped out.”

Buy stop orders have several specific uses. If you are short a December Wheat at 906, and wish to limit your loss to ½ cent per bushel, a buy stop order at 906 ½ would be appropriate; however, such “stop loss” orders do not actually limit the loss to exactly ½ cent when activated because they become market orders and must be executed at whatever price the market conditions dictate.

Another use is when you have no position and believe that if December Wheat reaches 906½, this would signal the beginning of an important uptrend in Wheat prices. Thus, the same order to “Buy 20 Dec. Wheat 906 ½ Day Stop” is appropriate.

A Sell Stop Order is placed below the current market price, and is transformed into a market order when the futures price trades or is offered at or below the stop price. A sell stop can be used to limit losses (a stop loss order) on a long position, or establish a short position.

Sell stop orders have the same uses as buy stops, but in reverse. That is, if you are long 20 December Wheat at 906 and wish to limit this loss to 1 cent per bushel, a sell stop order at 905 would be appropriate, recognizing that there is no guarantee of a fill at 905. Similarly, if you have no position and believe that a sale of December Wheat at 905 would signal a downtrend in wheat prices, you could use the order to “Sell 20 December Wheat 905 Day Stop” for this purpose.

Example: “Sell 20 Dec Wheat 905 Day Stop.”

When deciding where to place a stop order, either to prevent losses or to protect profits, market volatility is usually the most important factor. A stop placed too close in a volatile market may result in the investor being “stopped out” too soon, while a stop not placed close enough to a relatively quiet market may not be triggered when the trader would have preferred a fill.

Market-if-Touched (MIT), or board orders are similar to stop orders in two ways:

1. They are activated when the price reaches the order level
2. They become market orders once they are activated

however, MIT orders are used differently from stops, as shown in the following diagram:

90.84 Sell MIT
90.74 Market Price
90.64 Buy MIT

Example: “Sell one September Sugar 1150 MIT.” The floor broker is told that if and when the price for September Sugar rises to 1150 per pound, he is to sell one contract at the market.

Because activation of a MIT order converts it into a market order, it may not be appropriate to use in thin or choppy markets.

A Buy MIT Order is placed below the current market price, and establishes a long position or closes a short position.

A Sell MIT Order is placed above the current market price, and establishes a short position or closes a long position.

Stop and MIT Orders are lower priority orders, and are filled after market orders.

Limit Orders are generally used to buy or sell at a specified price, or better. They are also known as resting orders because they don’t move, even once the limit price has been reached; i.e., they don’t become market orders.

90.84 Sell Limit
90.74 Market Price
90.64 Buy Limit

Limit orders may be inappropriate in fast-moving, liquid markets where prompt entry or exit is desired.

A Buy Limit Order is placed below the current market price, and will be filled only at or below the limit price.

Example: Buy Three Jan Silver N.Y. 1534.10.

This limit order instructs the floor broker to buy three contracts of January N.Y. Silver futures at 1534.10. Even with this simple order, however, one presumption is necessary – that the market price prevailing when the order is entered is 1534.10 or higher. If the price is below 1534.10, the broker could challenge on the basis that the client may have meant “Buy Three Jan N.Y. Silver 1534.10 stop.” Therefore, while it is always assumed that a limit order means “or better,” if possible, it saves confusion and challenges if the “OB” designation is added to the limit price. This is particularly true on orders near the market, or on pre-opening orders with the limit price based on the previous close, because no one knows whether the opening will be higher or lower than the previous close; for example, if NYMEX September crude oil is trading at $97.78/bbl., and a customer wishes to enter a limit order to sell 2 contracts at $97.75 (already better than the limit price), it may be advisable to enter the order as “Sell 2 September crude $97.75 OB.”

A Sell Limit Order is placed above the current market price, and will be filled only at or above the limit price.

Limit Orders are the lowest in priority and are filled after market, stop, and MIT orders have been filled. Thus, the market price may touch the limit order price, and the customer may not be entitled to a fill. If the order is not filled, it is not necessarily an error by the broker. The order with the earliest time stamp takes priority.

Stop Limit Orders are used like stop orders, but execution is restricted to the limit price or better. They do not become market orders once the stop price has been reached.

90.84 Buy Stop Limit
90.74 Market Price
90.64 Sell Stop Limit

Stop limit orders are not generally used to close positions if getting a fill is most important.

A Buy Stop Limit is activated when the commodity is bid or traded at or above the stop level; however, the order will not be filled unless the price subsequently remains at or drops below the limit level.

A Sell Stop Limit is activated when the commodity is offered or traded at or below the stop level; however, the order will not be filled unless the price subsequently remains at or rises above the limit level.

For a Stop Limit Order, the price for the stop and the price for the limit need not be at the same level; for example, an order might read “Buy 90.84 stop 90.90 limit.” The order would be activated when the price reached 90.84, but would be filled only if it remained at or below 90.90.

Stop limit orders are particularly useful when you have no position and wish to enter a market via the stop order, but want to put some reasonable limit as to what you will pay. On the other hand, stop limit orders are not useful when you have an open position and wish to prevent a loss beyond a certain point. By limiting the broker to a certain price after a “stop loss” order is elected, you run the risk that the market may exceed the limit before the broker can execute. Thus, you would not get a fill—the broker would have to wait for the prices to return to the limit before executing.

Stop Limit Orders offer some price protection, especially in fast-moving markets; however, no order can be guaranteed an execution when market prices fluctuate wildly; i.e., move limit-up or -down. If the stop limit order is filled, it will be filled at the limit price or better.

Stop Limit Orders are, along with limit orders, the lowest priority orders to be filled.

Example: “Buy One February Pork Belly 84.10 Day Stop Limit 84.25.”

A spread is simultaneous long and short positions in the same or related commodities. Thus a Spread Order buys one month of a certain commodity and sells another month of the same commodity, or buys one month of one commodity and sells the same or another month of a related commodity.

Example: “Buy 5 July Beans Market and Sell 5 May Beans Market” or “Buy 10 Kansas City Dec Wheat Market and Sell 10 Chicago May Wheat Market.”

Another Example: “Buy 5 May Corn Market and Sell 5 May Wheat Market.”

For the related commodity spread, you may expect to profit from an anticipated tightness in the Corn Market causing the corn contract to gain in value faster than wheat.

If you have a position in a commodity and want to change to a nearer or more distant month of the same commodity, you could enter a spread order. For example, if you are long 5,000 bushels of May Soybeans on May 20 and want to avoid delivery notice by rolling forward into the July contract, the order would be: “Buy 5 July Beans Market and Sell 5 May Beans Market.”

Sometimes you may prefer not to use market orders, in which case the spread difference can be specified.

Example: “Buy 5 July Beans and Sell 5 May Beans July 2¢ Over.” Even though the prices of the two contracts are not specified, the broker is allowed to execute at any time he can do so with July selling at 2¢ or less above May. Over or under designations are a necessity for clarity to the floor broker. Omitting either is like omitting the price.

The following chart shows the relationship between the market price and where each type of order should be placed:

90.84	Buy Stop/Sell MIT/Sell Limit/Buy Stop Limit
90.74	Market Price FOK (Quick)
90.64	Sell Stop/Buy MIT/Buy Limit/Sell Stop Limit

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