Definition of Open Order
An open order is a trade order that has been submitted to a broker or trading system but is not yet completed or filled. It remains active in the market until it is either executed, canceled, or until it expires. These orders are significant components in trading, affecting liquidity and market behavior.
How Open Orders Work
Open orders are integral to market operations, providing liquidity and enabling traders to execute strategies over time. Here’s a deeper look into how they function:
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Placement of Order: A trader places an order specifying the security, quantity, price, and type of order (e.g., limit order, market order).
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Order and Market Interaction: The order enters the market. If conditions are met (e.g., price reaches specified limit), the order gets filled. If not, it remains open.
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Order Modification and Cancellation: Traders can modify or cancel open orders unless they are already partially filled or executed.
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Expiration: Orders can have specific expiry times (e.g., end of the trading day, good-till-cancelled).
Types of Open Orders
- Limit Order: Specifies a price limit at which the order must be filled.
- Stop Order: Becomes a market order when a certain price is reached.
- Stop-Limit Order: Becomes a limit order when a certain price is reached.
- Market Order: Executes at the current market price, usually filled immediately; not typically an open order.
Common Causes for Open Orders
Open orders occur due to various reasons, including:
- Unfavorable Market Conditions: Prices do not reach the specified limit or stop levels.
- Large Orders: Large trades that cannot be filled instantaneously due to insufficient market liquidity.
- Timing Preferences: Traders may place orders with future objectives or based on specific market conditions.
Examples of Open Orders
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A trader places a buy limit order for 100 shares of XYZ at $50. The current price is $51. The order remains open until the price drops to $50, at which point it might be filled.
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Institutional investors placing large volume trades that get partially filled and remain open for extended periods.
Historical Context
Open orders have been a part of trading since the advent of organized stock exchanges. Their role has evolved with the advent of electronic trading, which enables more complex order types and strategies.
Applicability in Modern Trading
In today’s high-frequency trading environment, open orders are crucial for executing sophisticated trading strategies, market making, and risk management. They allow traders to express precise market views without continuously monitoring the market.
Related Terms
- Filled Order: An order that has been successfully executed.
- Partial Fill: When only part of the order is executed.
- Pending Order: A synonym for open order.
- Order Book: Electronic list of buy and sell orders for a security.
FAQs
What happens if an open order is not filled?
Can I cancel an open order?
How long do open orders last?
References
- Hull, John C. Options, Futures, and Other Derivatives. Pearson.
- Harris, Larry. Trading and Exchanges: Market Microstructure for Practitioners. Oxford University Press.
- Securities and Exchange Commission (SEC) - www.sec.gov
Summary
Open orders play a crucial role in financial markets by providing liquidity and facilitating orderly trading. Understanding their mechanisms, types, and the reasons they remain open can help traders execute more informed and effective trading strategies.
