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101 Concepts for the Level I Exam

Concept 70: Execution, Validity and Clearing Instructions


Orders entered must specify what security to trade, size of the trade and whether to buy or sell. The order can also include additional instructions:

  • Execution instruction: specifies how the order will be filled.
  • Validity instruction: specifies when the order may be filled.
  • Clearing instruction: specifies how the final settlement will be done.

Execution instructions types are:

  • Market orders: are immediately executed at the best price available; however, there can be substantial slippages in execution price if a stock is thinly traded.
  • Limit orders: set a minimum execution price on sell orders and maximum execution price on buy orders. This ensures that an investor never exceeds his price limit on a transaction. However, there is a possibility that the order may not execute at all if the markets are fast moving or there isn’t enough liquidity.
  • All or nothing orders: will be executed only if the entire quantity can be traded. They are beneficial when the trading costs depend on the number of executed trades and not on the size of the order.
  • Hidden orders: are large orders that are known only to the brokers or exchanges executing them until the trades are executed.
  • Iceberg orders: A small visible portion of a large hidden order is executed first, to gauge the market liquidity before the entire order is executed.

Validity instructions types are:

  • Day orders: expire if they are unfilled on the trading day on which they were submitted.
  • Good-till-cancelled orders: last until the order is executed or the trader cancels the order.
  • Immediate or cancel (fill or kill) orders: are to be immediately filled i.e. when they are received by the broker or exchange. If it fails to execute, the order is canceled from the system.
  • Good-on-close (market-on-close): can only be filled at the close of trading. Mutual funds often rely on this order type.
  • Stop orders (also called stop-loss orders): come with a trigger price. Stop-sell order executes only if the price is at or below the stop price or trigger price. Stop-buy order executes only if the price is at or above the stop price or trigger price.

Clearing instructions convey who is responsible for clearing and settling the trade.