Orders: The Building Blocks of Strategy

If you can’t personally stand on the exchange floor and shout your trades, you need orders. In Chapter 4, Larry Harris breaks down the different types of instructions you can give your broker and why the specific type you choose is the biggest factor in your success.

Liquidity: Are You Giving or Taking?

Everything in trading comes down to liquidity.

• Taking Liquidity: When you want to trade now, you seize an opportunity someone else provided. You pay for this privilege.
• Offering Liquidity: When you put an order out there and wait for someone to come to you, you are providing a service. You hope to get a better price in exchange for your patience.

The Market Order: “I Need it Now”

A market order is simple: “Buy (or sell) this for me at the best price available immediately.”

• The Cost: You “pay the spread.” If the market is 100 bid / 102 ask, your market buy happens at 102. You just lost $1 relative to the “fair” price (101) before you even started.
• The Risk: For big orders, you might experience Market Impact. If you want to buy more shares than are available at 102, the price will jump to 103, 104, and so on as you “eat” through the offers.

The Limit Order: “On My Terms Only”

A limit order says: “I’ll buy, but only at $100 or less.”

• The “Free Option” Problem: This is a key insight from Harris. A standing limit order is basically a free option you are giving to the rest of the market. If news breaks and the stock is suddenly worth $90, someone will “exercise” your $100 buy limit order before you can cancel it.
• Regret: You face two types of regret. Execution uncertainty (the price never hits your limit, and you miss out) and Ex post regret (the price hits your limit and then keeps going, meaning you bought a falling knife).

Stop Orders: The Momentum Igniters

Stop orders are often confused with limit orders, but they work backward. A Stop-Loss order says: “If the price falls to $90, I’m out—sell at the market immediately.”

• Momentum: Stop orders are “destabilizing.” They add selling pressure when the market is already falling, which can cause prices to crash even faster.

The Pro Moves: MIT and Not-Held

• Market-if-Touched (MIT): Like a limit order, but it turns into a market order once the price is hit. It ensures you get the trade done if the price ever gets to your level.
• Market-Not-Held: This is what the big boys use. They give a floor broker 100,000 shares and say, “Use your brain. Don’t dump it all at once, and I won’t hold you responsible if you don’t get a fill right away.” It gives the broker discretion.

Summary of Order Types

Understanding these is the first step to not getting eaten alive in the markets. Next time, we’ll look at Market Structures—the arenas where these orders fight it out.

Next Post: Market Structures