Held Order

What Is Held Order?

A held order is a market order that requires prompt execution for an immediate fill. This can be contrasted with a not-held order, which provides brokers with both time and price discretion to try and get a better fill for a customer.

Understanding Held Order

In most cases, a trade is expected to be executed at the best offer for buy orders or at the best bid for sell orders. Market orders are a common example of held orders. When filling a held order, traders have very little discretion in finding a price because time is scarce. Typically, they will be required to match the highest bid or lowest offer to facilitate an immediate transaction.

For example, if the bid-ask market spread in Apple Inc. (AAPL) is $156.90 / $157.00 and a trader receives a held order to purchase 100 shares, they would place a buy order at the offer price of $157.00, which would be executed immediately under normal market conditions.

Held orders are used by investors who need to change their exposure to a particular stock and want their order(s) executed without delay.

There are times when a placing held order is not advisable. One such instance is when you are dealing in illiquid stocks. Suppose a small-cap stock has a wide bid-ask market spread of $1.50 / $2.25. A trader who uses a held order is forced to pay the 33.3% spread ($0.75 / $2.25) to get prompt execution. In this instance, the trader may get a better price if they use discretion and sit at the top of the bid and incrementally increase the order price to entice a seller out of the woodwork. Of course, the 33.3% spread may be a reasonable price to pay if the trader is playing a breakout or closing a position that was a fat finger error to begin with.

Held orders implicitly come with an immediate-or-cancel (IOC) condition attached to them.

Held Order Uses

Most investors want to get the best price possible, but there are three situations that held orders are ideal for:

1. Trading Breakouts — A held order could be used to enter the market on a breakout if the trader wants an immediate entry into a stock and is not concerned about slippage costs. Slippage occurs if a market maker alters the spread to their advantage after receiving a market order. In a fast-moving stock, traders are often prepared to pay slippage to ensure they receive an instant fill.
2. Closing an Error Position — Traders may place a held order to unwind an error position they want to close immediately to reduce downside risk. For example, an investor may realize they had purchased the wrong stock and would place a held order to quickly reverse the position before they buy the correct security.
3. Hedging — If a trader is engaging in a hedged order, the hedge should be filled as soon as possible after the initial position is established so that the price of the hedging instrument does not change such that it is no longer an effective hedge. A held order would be useful in facilitating this.