The trading of futures contracts is conducted in similar fashion to stock trading. The same basic market participants are required to facilitate this activity. The common elements are the brokers that accept and place orders according to the client and the exchanges where the brokers meet to conduct the trading. An important and different part of this process is the clearinghouse. At the end of each trading day, this entity matches all the buy orders against all the sell orders and transfers the net cash to and from the brokers responsible for the order. This matching process aids equilibrium in the markets and that orders executed are accounted.
According to Inside Futures there are a total of 14 types of orders.. The orders described include the following.
A market order is an order that instructs the broker to buy or sell immediately. It is exercised the moment it hits the trading pit. This type of order results in instant execution without any restriction on the price of the trade.
A limit order instructs the broker to make the trade at a specific price. Limit orders that are placed outside the trading range may not be executed even if the market price briefly reaches the limit. This type of order does not guarantee execution.
A stop-loss or stop-limit order has characteristics of both a market order and a limit order. The order is entered at a specific price and when the price reaches this point, it becomes a market order. The trade is completed at the market price. Sell stops are place below the market price and Buy stops are placed above it. The hybrid effects of this order suggest this as the type or order to use when protecting gains or avoiding further losses of open positions.
A stop-with-limit order consists of setting a range of prices. This instructs the broker when to execute the order without violating the boundary set on the other side. The restrictions associated with this orders suggest best use during normal trading. When market conditions are volatile and the price swings are wide, such orders may not be properly executed at the floor.
A stop close order gives the instruction to execute a trade when the specified price has been reached at the close of the day. Market conditions may result in an undesirable entry price as settling trades at the end of the day tends to be a hectic moment. However this can be useful in preventing entry during a volatile trading day.
The market if touched order is opposite of a stop-loss order. Buy stops are below the market price and sell stops are above it. This type of order is used to enter a new position based on finding a perceived better entry point. This order will not be executed if the price limit is not reached.
The good till canceled order is an order that remains in the hands of the broker until it is filled or canceled by the customer. This is also called an open order and is used in connection with a stop or limit order. Joining these together extends the life of the stop or limit order so that it does not have to be entered with the broker every day. Without the good till canceled feature any order entered with a broker that is not executed during a trading day will expire.
A one-cancels-the-other order is an order that sets two price points for execution. When price ranges have a wide swing during the day this type of order enables entry in the event that the desired market takes off in the anticipated move. This is a combine stop order, with one stop place below the market price and the other above. When one of the orders is executed, the other is canceled.
The market on close order is a discretionary order placed in the hands of the floor broker. This means that execution is not guaranteed. The market conditions of the last fifteen minutes of trading exert the influence on the broker to execute or not.
A cancel order is applicable to all orders except market orders. This order is a request to remove the prior order from the floor broker. If the order is working and has not been reported, then the cancel request will not be honored. A cancel order will not reverse a working order that has been filled in such circumstances.
The spread order is unique to trading futures. Spread trading the simultaneous purchase of one contract with a sale in a different yet related contract. Profits and losses are based on the price differential. This type of order simplifies the process by not having to have one open buy order and a separate sell order with the floor broker.
A fill or kill is an order that requires to floor broker to execute at a certain price immediately or not at all. The floor broker will place these orders to all other brokers three times. If not accepted by another broker, then is it returned unable to complete.
A not held order is an order paced to a floor broker for execution. This is an order that is placed by money managers that service accounts held at different brokers. These fund managers rely upon one broker to complete the trade for all accounts. At the end of the day reconciliation and allocation of the trades to all accounts is done.
These trading instructions are general in scope and terms. The broker that holds the account and accepts the trading instructions may impose restrictions or add modifications depending on how the firm executes trading for its customers. The column labeled “FUT” is the type of orders Interactive Brokers accepts. This list is based on the electronic trading platform this broker uses instead of traditional floor brokers.
It is the self-directed customers responsibility to understand what types of orders a broker accepts in light of the type of trading to be conducted.