What are discretionary orders?

Discretionary orders, which are also known as not-held orders, are conditions that empower a broker. It gives him the latitude for execution regarding timing, price, and the like. These are orders where market professionals like a broker can place orders and execute them without asking consent from the client.

Discretionary orders increase the specification of standard types of conditional orders. This gives the orders more chances for execution as it allows the client or investors to name his conditions and constraints to the broker. What are these standard types of conditional orders? They may come with additional discretionary components such as those added to limit or stop-loss orders. Discretionary orders are basic provisions so that the client can include the price that he prefers with his order. So, if the broker has a limit order with discretion, he can choose the change the limit price as he acts accordingly with the activities and liquidity in the market during the order’s receipt.

Placing discretionary orders

There are mainly two ways to place discretionary orders: through electronic trading systems or a broker. With the broker-dealer, the client can specify a conditional order with a discretionary amount. This amount is often quoted with cents. It gives the order more latitude for execution beyond the standard conditions. The broker-dealers see these orders are special orders, and they aim to submit them considering the best price for the customer.

The broker-dealer allowances make a significant impact on discretionary orders. Should they be offered, they will be added to all order types. But sometimes, investors add discretionary amounts to a single-day order. These amounts can also be added to good-til-canceled orders as they remain open unless the investor cancels them.

Let us cite an example.

It is not uncommon for investors to add discretionary amounts to their typical orders, such as buy and sell limit orders. Limit orders are known to be the most basic conditional order. Investors can choose a price they prefer if they want to buy or sell securities. Buy limit order prices will be lower than the market price. On the other hand, sell limit orders are beyond the market price.

Let us say that you have a discretionary buy limit order. You can specify an amount lower than the market price for execution. Alongside that, you can also specify a discretionary amount through your broker or an electronic trading system. Let us say that you placed a buy limit order at $20 on stock priced at $22 with a 10-cent discretionary amount. Let us say that you chose a broker. He will submit and execute that for you.

Let us say that you want a sell limit order instead. You can specify a market price above the market price for execution. You can also set a discretionary amount along with the order. Let us say that you place a sell order at $22 on a stock trading at $20 with a 20-cent discretionary amount. The order submission and execution can happen at $21.90 or more.

There is management for that.

Before we end today’s topic, know that there is investment management called discretionary investment management. A portfolio manager or investment counselor makes buy and sell decisions for the account on behalf of the client. As the term discretionary suggests, the portfolio manager has the power to make investment decisions. Hence, the client should completely trust the portfolio manager and his capabilities of making the best decisions for the account to become more profitable.