Types of Futures Orders
Here we will look at a few of the more common methods of executing a futures trade. These could be for hedging a physical position or purely from a speculative standpoint. It is important to familiarize yourself with the different terminology as speed is of the essence when placing an order, and the last thing you want is your broker asking you to clarify because you weren’t exactly sure how to place an order.
At Market/At Best: If you ask your broker to execute a trade at market or at best, you are instructing them to buy or sell at whatever the current on-screen bid or offer is irrespective of the order depth. For example, if you want to sell 20 lots of Aluminium at market, the broker will fill you based on whatever price is currently bid. If there are 20 lots available, that will be your price. However, if there are only 10 lots available, then you will be filled at the screen price for 10 lots, and then the broker will work down the depth chart to get the next best price for the remaining lots until your order is filled. Per the last article on slippage, your final price may be lower (or higher if you are buying) than what was on-screen when you went to execute.
Stop Order: If you are buying or selling on-stop, you are putting in a trade that you only wish to execute should the market decrease from its current price if you are selling, or increase from the current price if you are buying. For example, if the LME copper market was trading at $9,200/mt and you placed a 10-lot sell-stop order at $9,150/mt, this means that until the price dropped to $9,150/mt you would not have sold any futures. The stop order is placed to offer protection such that if the market drops to the level of your stop, your order will be automatically triggered and filled at the best available price, preventing further losses should the market not recover. The same is true for buy-stop orders - in this example where copper was trading at $9,200/mt, you might place a buy-stop order at $9,250. You are telling the broker that should the market rally to $9,250, you want to be filled at best to prevent further losses. Importantly, stop orders will be filled in their entirety regardless of the market liquidity at that time. If your stop order is for 40 lots but when the stop level was triggered there were only 5 lots available, you will be filled at the next best bid or offer until your order is filled.
While you are not guaranteed to be filled exactly at your stop level, stop orders are a key component of mitigating risk, particularly in speculative positions. Stop orders are not just for exiting positions - many trading strategies will utilize resting stop orders to enter trades based on pre-determined levels.
Limit Order: A limit order is similar to a stop order in that it will not execute upon placing with a broker. However, limit orders are placed when trying to capture additional value. A limit order is placed at a value above the current market if you are selling, and below the current market if you are buying. Should the market reach the level of your limit order, it will be automatically executed if there is enough liquidity to fill your order. Sticking with the same copper example above, If the current market was $9,200/mt, you might place a limit order to buy 10 lots at $9,150/mt. Conversely, if you were selling you could place a limit order to sell 10 lots at $9,250/mt. You are trying to capture an additional $50/mt vs the current market price. There is a key difference between limit orders and stop orders. Stops are always filled in their entirety once triggered, limits can only be filled in their entirety if there are enough bids or offers at the level of your limit. This can cause frustration if you see the last traded price is at your limit level, but you are only filled on 2 out of 10 lots. However, you cannot expect to receive a complete fill on 10 lots if there were only 2 lots bid or offered at your target price.
You will often hear traders ask brokers to “work to buy” or “work to sell” - they are asking their broker to work a limit order.
One Cancels the Other (OCO): An OCO trade is a combination of a limit order and a stop order. Traders will place OCOs when they want to allow some room for a trade to run to potentially pick up more profit, but they also want protection should the market move against their position. If either the stop or the limit order is triggered, the other half of the order is automatically canceled. For example, if copper is trading at $9,200/mt, and a trader places an order to sell 20 lots OCO with a stop at $9,100 and a limit at $9,300, it means that if the market drops to $9,100, a sell stop will be triggered and they will receive a fill at the best available bid at that time for all 20 lots. If this happens, their limit order of $9,300 will automatically be canceled. If however the market rallied from $9,200/mt to $9,300/mt (and there was enough liquidity), they would receive a fill at $9,300/mt and their stop order at $9,100/mt would automatically be canceled. A buy OCO order works in exactly the same fashion but in this example with a current price of $9,200/mt, the limit would have been at $9,100/mt and the stop at $9,300/mt.
Iceberg Trades: Traders will utilize iceberg trades when they don’t want to show their full order size to the market, often when working with commodities with less liquidity, or when placing large orders. An iceberg trade is aptly named - the tip of the iceberg is the number of lots shown to the market at any one time but it will be significantly less than the trader’s total order. The bulk of the size of the order remains hidden, much like the bulk of an iceberg remains underwater. Let’s say a trader wants to sell 100 lots of aluminum futures at $2,400/mt and the current market is $2,395/mt. If they were to show all 100 lots at $2,400/mt, it may well spook the market as all market participants would see a large order come in at that level. What often happens in that scenario is other participants start adjusting their orders to below $2,400/mt - if enough selling were to happen it could prevent $2,400/mt being reached at all.
An iceberg trade allows the trader to only show a handful of the 100-lot order at a time. Let’s say they worked the iceberg in 10-lot clips - this means that only 10 lots of the trader’s order would show up on the depth chart at a time. If the market increased and they were filled at their $2,400/mt level for 10 lots, the next 10 lots would automatically be shown. The trade continues to work in this way until all 100 lots have been filled, or the trader adjusts the order.
Iceberg trades do have a downside - each time a part of your order is filled, the next set of lots goes to the back of the queue for that price level. It is a judgment call whether to use iceberg trades as there is a real risk that not placing all of your lots at once results in only partial fills. I have also seen traders and customers get frustrated because they don’t fully understand how an iceberg trade works. It is possible that when using an iceberg trade, the market can trade through your target level and back down (if selling) or back up (if buying) without getting a full fill on your trade. If the market is volatile enough and the liquidity is low enough, the price could easily move through a target level, you receive a fill on the first set of lots, but when the next set of lots from the iceberg gets placed, the price is again below the target level and the trade continues to work.
Order Validity
While not a type of trade, order validity is an extremely important part of placing a trade. The validity of a trade tells the broker exactly how long you want them to work the order for. You can place a trade with pretty much any validity that you like, from minutes after the order is placed up to weeks or months, or indefinitely. However, there are a couple of acronyms you should be familiar with as they are the most commonly used.
Good ‘Till Canceled (GTC): A GTC order will be worked until the trader that placed the order cancels it. It is vitally important to keep track of GTC orders as brokers will assume they are still active even if you have forgotten about them. You don’t want to wake up to a fill on an order you should have canceled a week ago.
Good For the Day (GFD): A GFD order will be worked until the end of the trading day that it is placed on. If the broker does not receive further instructions on the trade, it will be automatically canceled.
