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Order Types for Futures Traders

The many varieties of different order types available are just one of the many reasons why traders often choose futures as a way to access the markets (this article covers some of the other reasons traders opt for futures).

 

As a futures trader you will execute all your trades on a centralised exchange through a broker. Futures exchanges only actually accept two types of order, and all other variations on these are the result of the way your broker’s platform handles the order; having access to the types of order you need to be able to implement your strategy is therefore a key factor when choosing a futures broker.

 

The types of order that may actually be used by a buyer or seller of futures to interact with other buyers and sellers are specified by the exchange, not the futures broker, and are dependent on the rules governing the order book for that particular exchange. Most futures exchanges operate what is known as a FIFO (‘first in, first out’) limit order book, and also accept market orders to interact with limit orders on the book.

 

The different order types that you see listed within your trading platform are variations upon the order types offered by the exchange, and are held and managed entirely on your broker’s servers. How the order responds to market price change whilst it sits entirely with the broker can be controlled by your trading platform in ways that it cannot once it hits the books of an exchange; as soon as the order is actually submitted to the exchange it must conform to one of the permitted order types and will behave accordingly.

 

A stop order is a good example of this. Although offered by every single brokerage firm, there is no such thing as a stop order as far as an exchange such as the CME is concerned. All orders are defined by this exchange as either passive, liquidity making orders (limits), or active, liquidity-taking orders (marketable).

 

As you will probably be aware, a buy stop order is an order to buy if price reaches or exceeds a specified price above the current market. If this price is reached the order will be filled, and in the meantime it will be resting. What actually happens when you place a stop order such as this in your trading platform? Firstly it is transmitted to your broker’s server where it is held and managed (or, in some cases, it is actually managed on your own computer within your trading platform). When the price level of the stop order is reached, the order is then passed to the exchange as a market order.

 

Keeping this in mind, you can easily begin to imagine how other more complex order types can be created and offered by your broker. The vast majority of these simply specify the conditions which must be met before a market order is submitted to the exchange, while a smaller number stipulate conditions for the cancellation of un-filled orders.

 

Before choosing a futures broker it is wise to compare the types of order that are supported by that firm’s execution platform.