What Is a Held Order?
A held order is a type of market order demanding immediate execution to secure a prompt fill. Unlike a not-held order—where brokers have the flexibility to find the best price over time—a held order requires instant action.
Key Takeaways
- A held order necessitates immediate execution by the broker, much like a market order.
- The advantage of a held order is guaranteed execution without delay, ensuring fulfillment of the entire buy or sell order size.
- In contrast, a not-held order allows brokers the discretion of timing and pricing to achieve possibly better outcomes.
Deep Dive Into Held Orders
Generally, trades are intended to execute at the best offer for buys or the best bid for sells. Market orders, a form of held orders, leave little room for price hunting due to their time-sensitive nature. Traders typically conform to the highest bid or the lowest offer for immediate transaction completion.
For instance, if Apple Inc.’s (AAPL) bid-ask spread is $156.90 / $157.00, and a trader receives a held order to buy 100 shares, the order would be placed at the $157.00 offer price for an immediate fill assuming normal market conditions.
Held orders are common among investors needing urgent adjustment to their stock positions, requiring swift order execution.
However, these are not always advisable—particularly when dealing with illiquid stocks. Consider a small-cap stock with a $1.50 / $2.25 bid-ask spread. Executing a held order here would mean absorbing a 33.3% spread cost, which might be excessive unless urgency outweighs price sensitivity.
Held orders inherently carry an immediate-or-cancel (IOC) condition.
Practical Applications for Held Orders
Though most investors aim for best pricing, held orders shine in the following scenarios:
- Trading Breakouts — Use a held order during breakout trades to guarantee an immediate market entry, albeit with potential slippage costs. Rapid stock movements often justify paying slippage for instant fills.
- Closing an Error Position — Quickly reversing mistaken trades to limit downside exposure by leveraging held orders ensures immediate corrective actions.
- Hedging — Instantly fulfilling a hedge helps maintain its effectiveness by stabilizing prices post initial position establishment. A held order facilitates rapid alignment.
Related Terms: not-held order, market order, bid-ask spread, liquid stocks.
References
- Nasdaq. “Market Order”.
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is a held order in financial markets?
- [ ] An order that is suspended until the end of the trading day
- [ ] An order that requires manual approval before execution
- [x] An order that must be executed immediately at the current market price
- [ ] An order that is only executed during after-hours trading
## What is a key characteristic of a held order?
- [ ] It is cancellable at any time
- [ ] It is only for large institutional trades
- [x] Instant execution without delay
- [ ] It includes a specified limit price for execution
## How does a held order differ from a limit order?
- [ ] A held order involves a limit price
- [x] A held order is executed immediately at the current price
- [ ] A limit order guarantees execution
- [ ] A held order can only be placed by retail investors
## What type of investor is most likely to use a held order?
- [ ] Long-term investors
- [ ] Fundamental analysts
- [x] Day traders or active traders
- [ ] Pension fund managers
## In which market condition is a held order particularly useful?
- [ ] When the market is stable and not very volatile
- [x] When quick entry or exit is critical due to market volatility
- [ ] During after-hours trading sessions
- [ ] During the issuance of exchange-traded funds (ETFs)
## Which of the following is true about brokers and held orders?
- [ ] Brokers can delay the execution of held orders
- [ ] Brokers must manually vet each held order
- [x] Brokers must execute held orders immediately at the best available price
- [ ] Brokers can convert held orders into market orders
## What is the primary risk associated with held orders?
- [x] Executing at a disadvantageous price due to market conditions
- [ ] Delayed execution
- [ ] Orders only being partially filled
- [ ] Incurring higher transaction fees
## When compared to other types of orders, held orders provide which of the following advantages?
- [ ] Specified limit prices allow for better control
- [x] Faster execution at the market price
- [ ] Enhanced order customization
- [ ] Ability to place the order after market close
## How does the use of held orders affect market liquidity?
- [x] It increases market liquidity by providing immediacy in execution
- [ ] It decreases market liquidity due to its restrictive nature
- [ ] It has no substantial impact on market liquidity
- [ ] It creates liquidity only for short sellers
## Which regulatory guideline pertains to the use of held orders?
- [ ] Held orders can only be used in foreign exchanges
- [ ] Held orders do not need to comply with any specific regulations
- [x] Held orders must comply with rules ensuring prompt execution
- [ ] Held orders must always include a minimum execution price
