Chapter five, orders. Two common types of orders are market orders and limit orders. Market orders have no price specified. Market orders have no price specified. So, the customer wants to buy or sell and the order is executed at the best available price at the time. So, for example, maybe we wanted to go long crude and we're willing to take that position whether it cost us $40 a barrel, $40.50, $41 a barrel. So, the customer specifies the futures contract and the size, five contracts, 10 contracts, 100 contracts. They don't specify a price and it's executed at the best available price at the time. For our purposes, we would assume that market orders are always executed. Limit orders, on the other hand, have a price specified. So, limit orders have a price specified, and the customer only wants the trade at their specified price or better. So, they only actually want to buy or sell at their set price or better. The order is only executed if the price can be met. Now, it's important to note what or better means. Buy limit orders can be executed at the specified price or lower. So, for example, if you wanted to buy crude at $40 or better, what would you be willing to pay? $40 or less. Hey, if I can get it for $39.90, that's great. But I'm not willing to pay anything more than 40. where a sell limit order is at the specified price or higher. So if you were looking to sell crude at $41 a barrel, what would you be willing to take? I'd be willing to take 41 or even more. So here the customer specifies the futures, the size, but also the price that they're willing to trade at. Notice if you want to buy crude at 40 and it's currently trading at 41, there's no guarantee it will ever come down to 40 and you'll ever get executed. So execution is uncertain with limit orders. Now the third type of order and probably the most heavily tested on the series 3 are the stop orders. Stop orders are a type of what we call contingency order. It's contingent on a price being hit before the order is even an active order. So, the order is triggered or activated by the market trading at or through the stop price. Let me give you an example of how a stop order might be used. Let's say that we took our crude position at $40 a barrel. So, we went long crude, let's say, at $40 a barrel. Well, if we're long crude at $40 a barrel, we're hoping that the price of crude goes up. 41, 42, 45. We're making money. Our fear is that the price of crude might drop. Well, we might put in a sell stop below the market to protect us. So, maybe we put in a sell stop at 37. What that order is saying is if crude drops to $37 a barrel, then you want to get out of your long position by selling it. Now, a sell stop order is below the market and it will be activated when the futures contract trades down to that price or if it's offered at or below that stop price. So sell stops which are below the market quite often to protect a long position will be activated or triggered when that futures contract trades or is offered at or below that stop price. Now a buy stop order a buy stop order is often used to protect a short position. So let's say that we shorted crude at $40 a barrel. So, let's say we shorted crude at $40 a barrel. We're hoping it falls. Our risk is that it might go up. So, what we might do is place a buy stop order above the market to protect us in case crude starts to rally. So, maybe we we place a buy stop at 42. What is that order saying? Hey, if crude rallies up to 42, we want to get out of our short position. Stop orders are sometimes called stop losses because they're quite often used to protect a position. So if we're short crude at 40, we might have that buy stop at 42. What is that order saying? If crude rallies up to 42, then we want to get out. And to get out of that short position, we'd have to buy the commodity back, the futures back. Well, what would activate or trigger the buy stop if it rallied up? What signifies that it's rallied up to that price? Well, a trade would always signify that a price was obtained. But what else would signify that the price has rallied or risen to a certain level? If somebody is actually willing to pay that much if the commodity is bid, if the futures are bid at or above that stop price. So buy stops are activated with either a trade or a bid at or above that stop price. Now, probably the most common thing we hear tested on the series 3 is what the order becomes once it's activated. Notice a regular stop order becomes a market order for immediate execution. So as soon as it's triggered becomes a market order for immediate execution at the best available price where a stop limit order becomes a limit order and will only be executed at your specified price or better. So again the stop limit order may not get executed. Let's take a look at an example which is worth a lot of words. A customer is long November crude oil at $50.70 a barrel. Today crude oil opens at 46.25. Afraid of suffering large losses, your customer enters a protective order. Sell November crude oil at 42 stop. So notice they place that sell stop below the market to protect themselves. This order is not even active when it's placed. See, right now the futures are trading at 46. This is a sell order at 42. Why wouldn't you just sell at 46? Because this isn't even an active order. It won't be activated or triggered unless the commodity falls to $42. In this case, that would trigger or activate this sell stop order. So, what happens? Well, later it falls to 4210. Our order still is not triggered. 4206 still not triggered. 4203 still not triggered. It drops to 4198. Did it now fall to 42? It sure did. That trade at 4198 triggers our activates our order. But notice that is actually not our trade. That was two other parties doing a trade. And when they did that trade at 42 or less, that's what triggered our order to become active. Now, since it's a regular stop order, what does it become once activated? It becomes a market order to sell. To sell at what price? The best available price. What if all we could sell at right now is $41.97? Would we take it? The answer is yes, we would. Why? It became a market order to sell at the best available price. So that would be our execution. So notice it's activated or triggered when our stop price is reached. Then it becomes a market order for immediate execution at the best available price. Well, how would this have been different if it were a sell stop limit order at 42? Well, again, it trades the same way. It starts to fall. Okay. 4210. Our order is not activated yet. 4206. Not yet. 4203. It's not activated yet. Why? It didn't yet fall to 42. Now it falls to 4198. That triggers or activates our order. So notice it gets activated the exact same way. when the commodity in this case falls to 42 or lower. But now the sell stop limit becomes a limit order to sell at 42 or better. So if the best price you could sell at right now is 41.97, you would not have sold. Okay? If it continues to fall to 41.91, okay, you will not sell because you will only sell at 42 or better. And in the case of selling, that means I want 42 or more. So notice a big risk of placing a stop limit is the order might get activated but never get executed because you were not able to get your stop price or better. Okay, your limit price or better. So 5-second recap. Stop orders become market orders once activated for immediate execution at the best available price. Stop limit orders. Once activated, they get activated the same way, but they become limit orders and will only be executed at the specified price or better. Another type of order is what's called a market if touched order or sometimes abbreviated MIT order. Now, this is entered on the same side of the market as a limit order. And what do we mean by that? Sell MIT orders are above the market and buy MIT orders are below the market just like a normal limit order would be. But in some ways people think of them like stop orders because when a price is touched they become market orders. So notice the sell market if touched order is activated when the futures trade or is bid at or above the MIT price. So again what signifies that something has rallied up to a price? Well if there's a trade at a price then something has certainly hit a price. Two parties have agreed and done a trade. But what else would signify that something has rallied up to a certain price has risen? If someone's actually willing to pay that much for it, if there's a bid that high, that would signify that the futures contract is rallied to that price. The buy market if touched is placed below the market and becomes a market order when the futures fall to that price. What signifies the futures have fallen to that price? either a trade or if someone offers to sell it that cheap then it's definitely fallen to that price according to these orders. Now once activated the market if touched order becomes a market order and is executed at the best available price at the market price. Let's take a look at an example of an MIT marketive touched order and again you can pause the video to try it on your own. All right, let's take a look. Frank wants to take a long position in September sugar futures if the price drops to 1080 10.80 today. September sugar opens at 1090. Frank places the following order. Buy September sugar at 10.80 cents MIT market if touched. Then we could see the trades here. Well, let's take a look at what might happen here. So, first notice that Frank is placing a buy MIT below the market just like a limit order, right? If you placed a limit order to buy at 1080, that would say, "Hey, I want to buy it if I can buy it at 1080 or less, but I'm not willing to pay this 1090." The difference between that buy limit below the market and this buy at 1080 MIT is the MIT is also saying hey if it falls to 1080 I want to buy it but what the MIT is saying is I will buy it as long as it touches 1080 even if I can't actually buy it at 1080. So what happens here? Well later it drops to 1087. We're not willing to buy it at 1087. It drops to 1084. It drops to 1080. Now, let's say that that's not our trade. Two other parties were ahead of us in line and they do the trade at 1080 and we don't get to buy at 1080. Well, the fact that 1080 was just touched activates or triggers our order and it becomes now a market order. So notice right now maybe the best price you could buy at is 1081. If this were a regular limit order, your client would not be willing to pay 10.81. But since it's an MIT, a market if touched, once that 1080 was touched, even if we don't get to buy a 1080, we are willing to pay that 1081. It became a market order to buy at the best available price. And here's the key thing to know. the MIT can be executed at a worse price than was specified where a regular limit order you're saying I only want my specified price or better. The market if touched is saying as long as that price was touched it becomes a market order in this case to buy and I will buy even if I wind up paying more. Now, one of the things that really helps people understand the orders is to think about where they're placed in relation to the market. So, here we have this line. That's the market price. What orders are above the market? What orders are below the market? Well, some people remember that the slobs are above the market and bless are below the market. What the heck does this mean? The SL is the sell limit. And remember that the market if touched is placed on the same side of the market as the regular limit order. So sell limits are saying hey I want to sell if I could sell it at this price or better. So maybe crude let's say is at 40. We might place a sell limit at 42 saying hey if I can sell it at 42 I'll take that sale. The sell market if touched is saying hey I also want to sell if it rallies up to 42. But even if I wind up selling it a little bit worse than 42, I'll still take it as long as 42 was touched. So the sell limit and the sell MIT are above the market. Also remember the buy stops are above the market to protect the short position. So maybe we're short crude at 40. We place a buy stop or a buy stop limit at 43. That's saying, hey, if crude rallies to 43, then I want to close out my short position by buying back. The buy stop would become a market order once activated. The buy stop limit order would become a limit order once activated, but they're both placed above the prevailing market. Which orders are below the market? The buy limit and the buy market have touched. Again, let's say crude is at 40. We might have in a buy limit at 38 saying hey if I could buy it at 38 I want to go long. The market if touched at 38 would be saying hey if crude falls to 38 I I want to buy even if I wind up paying a bit more than 38. As long as it touched 38, then it becomes a market order. And then the sell stops, the sell stop and the sell stop limit below the market quite often to protect a long position. Maybe your long crude at 40. You want it to go up. You place a sell stop below the market to protect yourself in case it falls. If it falls to that price, okay, then you want to get out of that long position by selling. Now, the other thing you might want to note here is what does it take to trigger or activate an order? Remember those stop orders have to be triggered or activated. And even the MIT once a price is touched, it becomes a market order. Well, when we talk about what triggers or activates the orders above the market, it's a trade or a bid. So, that would be the buy stop, the buy stop limit, and the sell MIT are all sort of triggered or activated when the commodity rallies up to the price. What signifies that it's risen to a certain price? a trade or if somebody is actually willing to pay that much if somebody bids that high. So, a bid, not an offer, but a bid. Notice the orders below the market, the buy, MIT, and the sell stops, which could all be activated. What activates on the downside? What signifies that something has fallen to a certain price? Well, a trade will always signify that something has reached a price. But what else would activate or trigger the sell stops in the buy MIT? If someone offered to sell it that cheap. The fact that someone's bidding that much doesn't mean that it's fallen that much. But if someone's willing to sell it that cheaply, that would activate or trigger the order. Now, here you see all that on a chart. So, the market order, how is it executed? Just best available price. The buy limit placed below the market. How is it executed? At the specified price or lower. The sell limit above the market executed at the specified price or higher. I want to sell at this price or even more. Buy stops. Okay. Are above the market. So that includes the buy stop and the buy stop limit. Notice are above the market. How are they activated or triggered? By a trade or notice what else signifies that it's rallied up. Notice the buy stop and the buy stop limit by a bid at or above that price. What's the difference between the buy stop and the buy stop limit? Notice the buy stop, how is it executed? Becomes a market order best available price where the buy stop limit becomes a limit order only executed at the specified price or lower. Notice the sell stops. The sell stop and the sell stop limit are both below the market. What activates them? When it trades or someone offers to sell it that cheap, it triggers or activates it. The stop order again becomes a market order. The stop limit order becomes a limit order only to sell at the specified price or better. And when you're selling, better means more higher. And then the last ones, the buy MIT and the sell MIT. Remember these are placed in the same place as the regular limit order. So buy limits are below the market. Buy mits are below the market. What signifies that something has dropped in price, a trade or an offer that cheap? But again the buy MIT becomes a market order once that price is touched and it's best available price. The sell MIT above the market. If it rises up to that price, it becomes a market order with a trade or bid. That's what signifies it's rallied up to a certain price and it becomes a market order to trade at the best price. Let's take a look at an activity. Take a minute to complete the activity. Determine whether each order is typically entered above or below the current market price. So again, feel free to pause the video and answer it on your own first. Let's take a look at how you did. The buy limit is below the market. The sell limit is above the market. The buy stop, remember, often used to protect a short position placed above the market. The sell stop limit often used to protect long position sell stops placed below the market. Then the last two, the MITs placed the same side of the market as the regular limit orders. Buy MIT, okay, below the market just like a buy limit. Sell MIT above the market just like a regular sell limit. The difference between them and the regular limit order though again is once that price is touched, you will accept an inferior price because it became a market order. Other types of orders, not held orders, give the broker discretion as to price and time of execution. And they're not even held to whether an execution actually takes place. So, the broker's given authority as to really whether to take the position. The broker can't be held responsible for the actions they take or fail to take. So a not held order, the customer is specifying the futures contract, the number of contracts, whether they want to buy or sell, but they're leaving discretion as to price and time of execution. These orders are not considered discretionary orders that require a discretionary account because the only discretion they're actually leaving is to price and time of execution. The customer is selecting the commodity, the number of contracts, and whether they want to buy or sell. You could leave discretion as to price and time without it being considered a discretionary order. A one cancels other order instructs the broker to do one of two alternative orders. Whichever one is done first will automatically cancel the other. This is quite often to prevent double fills. Let me give you an example. your long crude at 40. You might have a sell limit in, hey, if I could sell it at 43, I'll sell it and take my profit and run. But we also have in a sell stop at 36 to protect oursel in case it falls. So, we place that sell stop at 36. Well, if one of those two orders are filled, so we were long crude, we have a sell limit above the market, a sell stop to protect us below the market. If one of the two are filled, we no longer have the position. We want the other order cancelled so that we don't get two sales. Give up. A give up is when one FCM gives up orders to another FCM. Sometimes to protect, okay, sort of the maybe full position that a client is working on. The FCMs will share commissions. So, we might give up orders to another FCM or floor broker to handle some of our order flow. A switch order, sometimes referred to as a liquidate and roll. Many people don't want to be in the contract as delivery approaches. We don't want to get stuck having to make or take delivery of the commodity. So what we'll do is we'll liquidate the position in the near month and we want to reestablish the position in a more distant month. So what we're doing is liquidating our position in the near month, reestablishing it in a more distant month. So notice liquidate and roll the existing position to a later delivery month. primarily used by speculators prior to first notice day because they don't want to actually be forced to make or take delivery. So, they close out the near-term position and reestablish it in a more deferred month. And the last one, very important, the allocation of bunched orders. Usually when a client places an order, you know what account that is for. But make sure you know that commodity trading advisors sometimes place large orders then will allocate the contracts post execution. So the CTA, the commodity trading advisor, doesn't need to specify at the time of placing the order the exact amount going into each account, but it must be done by the CTA or the account manager before the end of the day. And the regulators are very concerned about this. But when you can allocate trades postexecution, just think about it. The market may have already moved a little bit. Some trades may be profitable and some trades may be unprofitable. So they want to make sure, make sure you know this third bullet that it is subject to fair, equitable, nonpreferential treatment between your clients. So the allocation of the bunched order, make sure you know it doesn't need to be done at the time you place the order. You can allocate the bunched order postplacing the order, but the allocation must be fair and equitable, non-preferential. It's not like you're giving a certain customer the winning trades and other customers the losing trades. What you may want to do now is create a custom exam where you do some questions, maybe 10 questions on this chapter. What's up next? futures margin rules and calculating margin requirements.