What is a Held Order?
A held order is a market order that requires prompt execution for an immediate fill. This can be contrasted with a not-held order, which provides brokers with both time and price discretion to try and get a better fill for a customer.
A held order is given to a broker for prompt execution and an immediate fill, such as with a market order.
The benefit of a held order is that the customer will be sure to have executed the entire size of their order, whether a buy or a sale, without delay.
A not-held order, on the other hand, gives some discretion to the broker to work the order to try to find a better price.
Conditions for Issuing a Held Order
There are two circumstances where issuing a held order is ideal – i.e., trading a breakout and closing an error position.
1. Trading Breakouts
Held orders are particularly useful if a trader wants to immediately enter the market on a breakout. A breakout is defined as an increase in a security’s price above a resistance level (previous high) or a drop below a level of support (previous low). In addition, the trader should not be concerned about slippage costs.
Slippage occurs when, after receiving a market order, a market maker changes the bid-ask spread to their benefit. Hence, with a high turnover stock, a trader can choose to incur slippage costs in order to fill the order. It, therefore, depends if the trader is prepared to incur slippage to fill the order promptly.
2. Closing an Error Position
Such a scenario occurs when a trader makes an error in purchasing a security (for whatever reason). A held order, in this case, is placed to reverse the error position immediately in order to limit any foreseen or unforeseen downside risk. Because of its instantaneous execution attribute, a held order is perfect for unwinding an error position and immediately executing the correct trade.
Held Order Uses
Most investors want to get the best price possible, but there are three situations that held orders are ideal for:
- Trading Breakouts — A held order could be used to enter the market on a breakout if the trader wants an immediate entry into a stock and is not concerned about slippage costs. Slippage occurs if a market maker alters the spread to their advantage after receiving a market order. In a fast-moving stock, traders are often prepared to pay slippage to ensure they receive an instant fill.
- Closing an Error Position — Traders may place a held order to unwind an error position they want to close immediately to reduce downside risk. For example, an investor may realize they had purchased the wrong stock and would place a held order to quickly reverse the position before they buy the correct security.
- Hedging — If a trader is engaging in a hedged order, the hedge should be filled as soon as possible after the initial position is established so that the price of the hedging instrument does not change such that it is no longer an effective hedge. A held order would be useful in facilitating this.