When your order doesn’t arrive, it can be frustrating. Some strategies can help you improve your chances for faster execution. Try these three adjustments and tips.
Imagine you are planning to make a trade. You have done your research, performed due diligence, and now decided to buy some call options.
The market will open tomorrow after you place your limit order at the correct price.
You were right when 9:30 rolled around. You checked your account, and the order was not filled. How could it not have been filled? You’re right.
Understanding why some orders cannot be filled is the first step.
Brokers manage orders
The broker decides how to route the order and who will fulfill and execute it.
Market Making
If the broker sends the order to the trading floor for human traders to bid on the contract, this can cause a delay in execution.
The spread can benefit if the broker decides to complete the trade internally. This will lead to a quick order execution.
The broker may be unable to fulfill the trade and send it to another market maker. This third party will fill the order, pay the broker for the opportunity and then complete the transaction.
Order Type
You may not get your limit order filled if you do not reach the price in the contract. A market order may be served but not at the best price. When deciding how to execute an order, the broker will consider this.
Broker’s Obligations
The SEC protects traders by mandating brokers offer the best possible order execution. If you do not receive your order, it may be because the price of the contract you are trading was unacceptable.
Gap
The security chart can “gap” if many traders submit similar orders. This means there is a discrepancy between the charted and actual prices.
This gap could cause the price of your order to be higher than you had intended. If, for example, XYZ Corp. closed at $1.55 on 8/15 and you placed a limit order of $1.58, but the opening price was $1.62, many other people likely put in the same order, causing the price gap.
Low Volume
A low trading volume can make it difficult to fill orders, as each order requires a buyer and a seller. Blue-chip and other large companies have a lot of importance during the day. The smaller companies have fewer shares outstanding and, therefore, fewer options contracts.
It is common to see this if you make a large purchase on a contract with a low volume. You can avoid this by placing smaller orders rather than one large order. This way, you can fill some orders even if the book isn’t enough to cover all.
Timing
Most trading occurs right after the market’s opening (9:30). Before the close of the market (4:00). Most orders are placed by institutional investors, high-frequency traders, and professional investors during the busiest times of the day.
Around lunchtime, big traders slow down, so it’s an excellent time to place orders. They have a better chance of being fulfilled.
Changing the Number of Contracts
Most clients place orders in multiples of 5, 10, 15, and 20. Many traders place orders with the same number of contracts. This can affect your trade fulfillment as brokerages try to fulfill the same order for many traders.
To increase your chances of the broker being able to fulfill your order, try adjusting your quantity to odd numbers such as 3, 7, 9, or 11. These large investors and institutional buyers trade substantial lot sizes. You can bundle your trades with other contracts by using odd-number orders.
Brokers view these orders as “one-offs.” For example, if a trader places an order for four contracts and you place an alternative order for six instead of five, the two charges could be combined as an order of ten.
Avoid Round Number Pricing
The order size is the same as the price of a contract. The big traders use round numbers such as $200, $150, and $25.
Prices such as $23, $602, and $199 are good examples. Because the broker will match your order with a similar price rather than ignore it in favor of a larger order.
A price change can be a good strategy for achieving your desired contract fulfillment and volume.
Using the Optimal Order
You want your order to be fulfilled and get the best price. You don’t want to place a “market order,” thinking you’ll get a contract at $3.25 only to find out it went through for $4.00.
Combining limit and stop orders allows you to set a more extensive range, ensuring you receive the desired price without the risk of paying too much for the security.
Limitations
Limit orders are executed when the option price reaches or exceeds a predetermined level.
An investor, for example, wants to buy a call option on ABC Inc. which closed last at $2.33. ABC Inc. will release its earnings this week, and you would like to lock in an option below $2.40 because you believe the company will exceed the earnings expectations.
Limit orders at $2.40 will be accepted if they do not exceed $2.40 when the market opens.