What is a Not-Held Order?
A not-held order is a type of security order that gives a floor broker time and price discretion to secure the best possible price on a stock. When a broker places a not-held order, it means that he/she trusts the floor trader to get the best possible price on a stock than what the investor can get on their own. The broker uses personal judgment on the best price and time to enter or exit a trade.
Nonetheless, a not-held order holds the broker harmless, and they will not be responsible for any monetary losses that the investor suffers in the process. Usually, not-held orders are common with international stocks. The opposite of not-held orders is held order, which requires immediate execution since the trader is given little discretion in finding the best price.
- A not-held order refers to an order that gives a floor trader the discretion to find the best possible price on a stock.
- An investor placing a not-held order trusts the floor trader to obtain the best price than what the investor can achieve on their own.
- The two main types of not-held orders are market orders and limit orders.
How It Works
An investor who wants to sell or purchase securities in a securities exchange may at any time give the floor broker the authority to determine to best price and time when the order is executed. The arrangement allows the broker to make use of the discretion in terms of time or cash received to execute the order.
Not-held orders are common with foreign stocks, which an investor is not familiar with, and therefore, gives the floor broker the authority to decide on their behalf. The arrangement absolves the broker of any responsibility if the investor suffers a monetary loss.
Types of Not-Held Orders
1. Market Not-Held Order
A market not-held order is not required to be executed immediately. It is made through a floor broker or brokerage, and it is a request by an investor to buy or sell a security at the best possible price in the market. A market not-held order is considered the most reliable way of entering or exiting a trade quickly at the current market price.
For example, an investor may give an order to purchase 1000 AMZN stocks at the best possible price in the current market. Market orders incur the lowest commissions compared to a limit not-held order since they require less work from the broker.
When a trader requests a market order, it means that an investor is willing to sell or buy stocks at the asking price, and the broker executing the order can give up the bid-ask spread. Market not-held orders are most suited for securities that trade in high volumes, such as ETFs, large-cap stocks, and futures.
2. Limit Not-Held Order
A limit not-held order has an upper and lower limit attached, and the investor gives the floor broker the discretion to execute the order at the specified price or a better price. For buy orders, the broker is given the discretion to execute the order at the limit price or a lower price than the specified limit. A buy limit order allows the investor to pay the limit price or less.
For sell orders, the broker is required to execute the trade at the limit price or a higher price. Such orders cannot be executed if the trade does not meet the investor requirement, and it means that investors may miss out on potential trading opportunities.
A limit order gives the investor more control over the execution price, especially when they are hesitant to use a market order due to increased market volatility.
Market Orders vs. Limit Orders
Market orders and limit orders are the two main execution options that investors can use when selling or buying securities. Market orders come with an element of urgency, where trades are required to be completed at the best possible price as quickly as possible. In such a case, the speed of execution is more important than the market price of a security.
On the contrary, limit orders come with upper and lower price limits at which to make a purchase or sale decision. The price of a stock is primary to the limit order. If the current security value falls outside the specified limit of the order, the order will not be filled, and the transaction does not occur.
Advantages of Not-Held Orders
Not-held orders give the floor broker the authority to execute buy or sell trades on behalf of the investor. The floor broker is best suited to determine the best price and timing for executing the order since they are familiar with trading patterns and order flows at the exchange market.
The broker may also receive orders from other customers, which they can cross-trade to satisfy existing customer orders. Therefore, the broker can close trades sooner, compared to when the investors are executing trades on their own.
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