Understanding not-held orders
Before anything else, let us start discussing held orders. These are the ones that need quick execution so they can be filled immediately. They usually expect executions at the best offer and best bids for buy and sell orders. Market orders may be the most common example.
Now, for today's topic, we have not held orders. It may be pretty obvious why we defined held orders because they are their opposite. We described them so that we will have a better picture of both of them. Not held orders are usually market or limit orders. They give the broker discretion when it comes to time and price.
They are more liberated to do what they can to get the best price available, unlike held orders restricting that discretion. In this case, the brokercannot be blamed if his actions to find the best price available can lead to potential losses or missed opportunities. When brokers use not held orders, there is no pressure to execute the orders at an instant.
Tell me more about not-held orders
As an investor, if you place a not-held order, it means that you trust your broker enough to search for the best market price available instead of accessing the market directly by yourself. The broker has all the discretion regarding time and price, but they are not held responsible if it will lead to potential losses that you may have for this order.
Are you getting a hint on why it was called as such? They are called "not held" orders because the broker you will trust is also not held liable if he fails to execute a trade you prefer. Let us say that a broker got a discretion order to purchase 500 shares of Company A. the upper limit is $15, and they might feel like the market will decline. Hence, they will not buy stocks trading lower than $15. The market can rally, and the broker might fail to execute the order lower than $15. In this situation, the investor cannot complain because he trusted the broker and gave him all the discretions. We can encounter not-held orders, usually with internationally traded equities.
The best time to use not-held orders
Not-held orders are usually market or limit orders. We usually won't need them when the market is liquid enough because the investor has a lot of time to go in and out of positions. Hence, it is best to use not-held orders with illiquid stocks. They let brokers look for a better price instead of paying a wide spread to execute a market order. It is also wise to use it when there is increased volatility. Let us say that there is an after-earnings announcement, macroeconomic release, or broker downgrade. The broker can help with the previous experiences to get the best price and time to execute the order.
But remember
If you give your
trust to the broker that you gave him a not held order, know he cannot dispute
trade executions if he met all the regulatory requirements. Let us say that the
shareholder thinks that the broker made the wrong call in executing the not
held order before an FOMC rate announcement. It is not possible to rebook.
