Order Instruction

Mastering Order Instructions | CFA Level I Equity Investments

In this lesson, we’ll explore the various types of instructions a trader can specify when placing a market order. These instructions can be classified as execution, validity, and clearing instructions. You might be familiar with some of these terms if you’ve traded stocks before.

Execution Instructions

Execution instructions specify how to trade. The most common types are market orders and limit orders.

  • Market Order: Instructs the broker to execute the trade immediately at the best possible price.
  • Limit Order: Places a minimum execution price on sell orders and a maximum execution price on buy orders.


Margaret issues a market order to buy 4 shares, while Lee issues a limit order to buy 4 shares with a limit price of $233. If the sell queue when the orders were made are shown below, Margaret will have all 4 shares filled immediately, based on the best prices that in the queue.  For Lee’s order, only the best ask is below the limit price of $233.  Therefore only 1 of the 4 slots will be filled at this instance.

Price uncertainty is the biggest shortcoming of market orders, especially if the security has low trading volume relative to the order size. On the other hand, limit orders remove price uncertainty, but the order might not be filled or only be partially filled.

Limit Order Terminology

  • Marketable or Aggressively Priced: A limit buy order above the best ask or a limit sell order below the best bid.
  • Making a New Market or Inside the Market: A limit order with a price between the best bid and the best ask.
  • Making the Market: A limit buy order at the best bid or a limit sell order at the best ask.
  • Behind the Market: A buy order with a limit price below the best bid or a sell order with a limit price above the best ask.
  • Far from the Market: A limit buy order with a price much lower than the best bid, or a limit sell order with a price much higher than the best ask.

Trade Volume, Visibility, and Validity Instructions

Traders can specify the trade volume, trade visibility, and validity of the order.

  • All-or-Nothing Order: The broker executes only if the entire order can be filled.
  • Minimum Size: The trade only executes if the minimum size can be met.
  • Hidden Orders: Only the broker or exchange knows the trade size.
  • Iceberg Orders: Part of the trade is visible to the market, but the rest is not.
  • Day Orders: Expire if unfilled by the end of the trading day.
  • Good Til Canceled Orders: Last until filled or canceled by the trader.
  • Immediate-or-Cancel Orders: Canceled unless filled immediately. Also known as fill-or-kill orders.
  • Good-on-Close Orders: Filled at the end of the trading day. Market orders are called market-on-close orders.

Stop Orders

Stop orders execute only when the stop price has been met. They are often used to prevent losses or protect profits.

  • Stop-Sell Order: Triggers a market order to sell when the stock price falls to or below the stop price.
  • Stop-Buy Order: Triggers a market buy order when the stock price rises to or beyond the stop price.

Stop orders can be used by short sellers to limit losses from an increasing stock price, or by investors who want to buy a stock once it starts gaining momentum.

Clearing Instructions

Clearing instructions specify how the trade is to be cleared and settled. Retail trades are typically cleared and settled by the same broker that arranged the trade, while institutional trades may be settled by a custodian or another broker.

When a trader issues a sell order, it’s important to specify whether it’s a long sale or short sale. For a long sale, the broker must confirm that the securities held are available for delivery. If it’s a short sale, the broker must either borrow the security on behalf of the client or confirm that the client can borrow the security.

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