Execution Instructions

Traders have different strategies when it comes to selecting financial instruments for investment, and they can also have different strategies when deciding how their orders should be executed. Traders include __execution instructions__ with the orders they submit to brokers or exchanges that can impact the price at which the trade is completed. What do you think might be a reason why traders focus on the execution instructions attached to their trades?

Incorrect.

That's right!

The execution instructions traders provide with their orders play an important role in determining the price at which an order is filled. For example, a trader who identifies an attractive buying opportunity may not want to buy at any price, since a higher purchase price will reduce her potential profit from the trade, all else being equal. Giving explicit instructions can help the trader secure a more favorable price for her trade. Execution instructions do not reveal a trader's investment strategy to the market. These instructions are given to the brokers or exchanges that facilitate trade execution, so the marketplace will not be able to see inside the mind of the trader.

Types of orders include market orders and limit orders. __Market orders__ secure for the trader the best price available. __Limit orders__ also secure the best available price, but with a predefined cap on purchases, or a floor for sales. Orders can also include instructions that specify the size of a trade. An __all-or-nothing order__ will be executed if the entire trade size can be filled. __Minimum trade sizes__ can also be indicated. The costs incurred to settle trades will largely determine the size-related instructions a trader gives. If a trader were to submit an order to sell a stock with a USD 40 limit, and the stock is currently trading at USD 43, what do you think his eventual selling price could be?

Incorrect.

Exactly!

A trader who sets a limit for a sell order is indicating the selling price below which he does not want the order executed. So, for a stock that is trading at USD 43, he would be unwilling to accept anything less than USD 40, meaning the trade cannot be executed at USD 36. Alternatively, the trader would probably be thrilled to sell his stock at USD 45, because this price is above both the limit price he set with his execution instruction and the prevailing market price.

Traders must consider how the price they set for an order impacts the order's ultimate execution price. When seeking to buy an instrument quickly, traders must be willing to pay a higher price to increase the chances that the order will be filled. Conversely, sellers need to be willing to accept a lower price to make it more likely their orders are completed quickly.

Correct! If your friend is serious about liquidating her stock position, her best bet is probably to submit a sell order with a limit of USD 18. This price is aggressive compared to the stock's current price and stands to be executed quickly.

Incorrect. Placing an order to sell the stock at the same price at which it is currently trading is not the fastest way to exit a position. Your friend should consider placing an order with instructions that would increase the chances of its being filled right away, which for sell orders would be at a price more favorable to traders on the other side of the transaction.

Incorrect. A sell order priced above the market is unlikely to be filled rapidly. The price needs to be as favorable as possible to induce traders on the opposite side of the trade to transact quickly.

To summarize: [[summary]]

If your friend would like to sell a stock that just dropped from USD 22 to USD 20, and needs the proceeds in a timely manner to fund a vacation, what advice might you give her?

Doing so reveals the trader's entire investment strategy to other market participants

The price at which an order is filled can impact the potential profitability of the trading strategy

USD 36

USD 45

She should consider placing an order to sell at USD 18

She should consider placing an order to sell at USD 20

She should consider placing an order to sell at USD 22

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