What Is a Discretionary Order?
A discretionary order is a special condition placed on a trade that grants a broker enhanced flexibility in when and at what price an order is executed. This type of order can also be known as a ’not-held order.'
Key Takeaways
- Customer Trust: Discretionary orders signify that the investor trusts their broker to act in their best interest without requiring permission for each individual decision.
- Conditional Orders: They are often associated with conditional orders like limit and stop-loss orders, allowing brokers to adjust prices according to market conditions.
- Efficient Management: Integral to discretionary investment management where brokers or advisors handle trades without needing client consent for each action.
- Risk Adjustment: Relieves brokers from responsibility for potential losses if actions are aimed at achieving the best pricing and execution.
Elevate Your Trading: Understanding Discretionary Orders
Broadly speaking, a discretionary order empowers brokers or financial experts to place and execute orders without the client’s explicit acknowledgment for each trade. This capability broadens limitations from standard order types by increasing the likelihood of timely execution while adhering to certain specified constraints.
Conditional orders might include an additional discretionary component, commonly paired with limit and stop-loss orders. This component allows brokers to tweak the order to respond effectively as market activity or liquidity evolves. For instance, in a limit order with discretion, brokers can adjust the limit price based on current market dynamics.
Discretionary orders can be transacted via electronic systems or directly through a broker. These orders often quote discretionary amounts in cents, providing extra execution leeway beyond standard conditions. Identified as special, broker-dealers prioritize these submissions to secure the best prices for the client.
Broker or dealer allowances may dictate if discretionary orders can be attached to types like single-day or good ’til canceled (GTC) orders, which remain until executed or canceled.
Inspiring Examples of Discretionary Orders
Investors often bolster buy and sell limit orders with discretionary amounts to improve execution efficiency. For example:
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Discretionary Buy Limit Order: Consider an investor who places a buy limit order for $20 on a stock currently priced at $22, with a discretionary range of 10 cents. Essentially, the investor aims to purchase the stock at or below $20.10. If the price falls within this range, the order executes.
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Discretionary Sell Limit Order: Conversely, the same investor might set a $24 sell limit order on a stock priced at $22, with an added discretionary range of 10 cents. This setup allows the order to execute anytime the price rises to $23.90 or higher.
Driving Your Investments with Discretionary Management
Discretionary investment management represents a strategy where portfolio managers or investment counselors handle buying and selling decisions autonomously on behalf of clients. This hefty responsibility means that clients must hold the portfolio manager in high regard, entrusting them with significant financial decisions.
Only seasoned professionals with advanced financial acumen can offer discretionary investment management. Generally tailored to high-net-worth individuals, this service typically involves substantial investable assets. Clients are required to maintain discretionary accounts, allowing authorized trading by brokers without seeking consent for each transaction. This is frequently accompanied by a signed disclosure for documented client consent.
Often referred to as ‘managed accounts,’ brokers generally impose client minimum balances for eligible accounts, typically incurring management fees proportionate to assets under management (AUM).
Related Terms: not-held order, limit order, stop loss order, good ’til canceled order, buy limit order.
