What is a Protected Market Order?
Protected market orders cancel buy and sell orders for stocks or other assets and resend them as limit orders. If the price of a stock fluctuates unexpectedly and dramatically, the broker may submit a protected market order. After the market order is placed. The limit is set at or near the trader-determined fair market price.
The purpose of protected market orders is to protect brokers from inadvertently closing transactions in the worst of times.
- Protected market orders are a strategy to prevent losses caused by market volatility.
- Traders cancel market orders and replace them with protected market orders to ensure a reasonable price.
- Alternatively, you can cancel the order altogether or leave it alone. The latter can mean a big win or a big loss.
Protected market ordering mechanism
Protected market orders help prevent market orders from being fulfilled at unsustainable prices. That is, it has risen or fallen sharply, solely due to market volatility. Their prices can be expected to return to normal and the broker may have bought or sold at the wrong moment.
Orders on the protected market are conservative in nature. In short, traders have determined that the urge to get the best price possible is fighting the desire to avoid getting the worst price possible. During periods of high price volatility, traders can choose safety and accept reasonable returns with less risk.
Advantages and disadvantages of protected market orders
The transition to safety raises the issue of underimplementation. This is the difference between the apparent return on investment and the rate of return after considering all the costs to achieve it. These costs may include not acting at a better price for the investment at some point during the period.
This is an implicit cost that exceeds the explicit and easily identifiable costs of taxes and fees. Missing a trading opportunity is an implicit cost, as is the unfavorable price fluctuations that can occur between a trading decision and the fulfillment of an actual order. This latter problem is commonly referred to as “slippage”.
For protected market orders, the missed trading opportunity cost reflects the difference between the original unfulfilled market order price and the modified order price. This is often referred to as unrealized gain or loss.
Some slippage is normal. And no one has the skills and luck to buy and sell at the perfect time.
Example of protected market order
Suppose you place a protected market order to sell 1,000 shares of Company X at the current market price of $ 45. Only half of the orders will be filled at this price. Stock prices began to fall rapidly to $ 35. The original market order will be canceled and the limit order for the remaining stock will be placed for $ 40.
When the price returns to $ 40, the rest of the stock will be filled with sell orders.
If the broker did not cancel the order, the remaining shares could have been sold for $ 35. The broker got the highest price of $ 45 for half of the stock, but only the decent price of $ 40 for the other half.