An Order is an instruction to deal if the
market reaches a certain level. Two main types of Order are commonly used in the Foreign
Exchange market, the Stop Order and the Limit Order.Stop Orders
An instruction to deal if a market moves to a less favorable level (i.e. an
instruction to buy if a market goes up to a specified level, or to sell if a market goes
down to a specified level) is called a Stop Order. A Stop Order is often placed to put a
cap on the potential loss on an existing position; that is why Stop Orders are sometimes
called Stop-Loss Orders. However, a Stop Order can also be used to establish a new
position.
There are two very important points about Stop Orders:
1. You should be completely clear that it will not always be possible for us to
trigger a Stop Order at exactly the level you have specified. This is particularly so if
the market has moved very quickly, perhaps over the weekend, when your Stop Order may be
triggered at a level worse, possibly much worse, than the level you selected.
2. Unless otherwise agreed, a Stop Order to buy will be triggered when the interbank
market is offered at the specified price and a Stop Order to sell will be triggered when
the interbank market is bid at the specified price. In either case, the price you receive
will be adjusted to reflect the difference between your normal dealing spread and the
spread in the interbank market.
Example
You are a client who is normally quoted a 5-pip dealing spread. You have bought
$750,000 against the yen at 120.65. You believe that if the dollar falls below 120.00 yen
it could fall a lot further. So you put on a Stop Order to sell $750,000 against the yen
if $/Y is bid in the interbank market at 119.90.
Later that day, the market moves through 119.90. We are able to trigger your Stop
Order at the specified level of 119.90. You sell $750,000 against the yen at 119.89, one
pip lower, reflecting the difference between the 3-pip spread in the interbank market and
the 5-pip spread which you are normally quoted.
Limit Orders
An instruction to deal if a market moves to a more favourable level (i.e. an
instruction to buy if a market goes down to a specified level, or to sell if a market goes
up to a specified level) is called a Limit Order. A Limit Order is often used to take
profit on an existing position but can also be used to establish a new position.
It is important to understand that the normal dealing spread you pay will be taken
into account when determining whether a limit order has been triggered.
Example
You are a client who is normally quoted a 5-pip dealing spread. $/DM is trading at
1.7480. You believe the dollar is going to strengthen, but think that $/DM will fall back
to below 1.7450 before it goes higher. You put on a Limit Order to buy $1,000,000 against
the mark at 1.7450.
Your Limit Order is triggered when $/DM is offered in the interbank market at
1.7449, reflecting the difference between the 3-pip spread in the interbank market and the
5-pip spread which you are normally quoted. You buy $1,000,000 against the mark at 1.7450.
'OCO' Orders
An ‘OCO’ (‘One Cancels the Other’) Order is a special type of Order where a
Stop and a Limit Order, or sometimes two Stop Orders, in the same market are linked
together. With an OCO Order, the triggering of one of the two linked Orders results in the
automatic cancellation of the other Order.
Example
You sell $500,000 against the Swiss franc at 1.4530, looking for a short-term move
to 1.4450. However you decide that if $/SF moves above 1.4560 you want to cut out your
position. You put on a limit Order to buy $500,000 against the Swiss franc at 1.4450, and
a Stop Order to buy $500,000 against the Swiss franc at 1.4560 on an OCO basis.
'GTC' Orders
When placing an Order, you must specify for how long the Order is to be worked. You
might, for example, specify that a particular Order is ‘Good until 4pm today’. If you
do not specify how long the Order is to be worked, it will be treated as a GTC (Good until
Cancelled) Order. The GTC Order is a very common type of Order; it remains valid, 24 hours
a day, until you cancel it. Such an Order is not automatically cancelled at the close of
business on Friday evening either; it is reinstated on Monday morning unless you specify
otherwise.
Canceling Orders
It is very important to remember to cancel an Order if you no longer wish it to be
worked. It is your responsibility to do this. There are two particular points to note:
1. As stated above, we treat all Orders as GTC Orders unless you specify otherwise.
This is the normal market practice.
2. All Orders are taken on the basis that they are entirely independent from any
positions that you may currently have open. Say, for example that you have a long position
open in $/DM. To cap your potential loss, you place a GTC stop order to sell $/DM at a
lower level. Later, $/DM rallies and you sell to take your profit. Although you now have
no open position, your GTC stop order to sell at the lower level remains valid. It is your
responsibility to cancel it if you want to do so.
