Banning Market Orders: You Gotta Be Kidding!

The old standard market order may be going the way of the dinosaur should stock market industry group, FIX Protocol Limited, get its wish. The group has been pushing for a substantial list of order handling guidelines to mitigate risk ever since the May, 2010 Flash Crash. Among the suggestions are that brokers are to convert all incoming market orders to limit orders. Believe it or not the idea has gained support from a surprising number of brokers.

At first glance, this concept appears absolutely insane. However, a closer look reveals it isn’t that crazy. For example, when a trader places a market order, he or she does not wish the order to be executed far away from the current market price. The market order is placed and expected to be executed within a reasonable distance of the last known price on the screen. Open ended market orders can be suicidal in a fast moving market. This is particularly true in the event of extreme market moves. While most active traders already use limit orders in the majority of their trades, sometimes market orders are needed to not miss an entry. The market order banning suggestion would require brokers to convert market orders into limit orders within a certain percentage of price when the order was placed.

Credit Suisse is one of the major brokers who support the potential regulation. Dan Mathisson, head of electronic trading at the investment house, explained to Traders Magazine, “We strongly support this proposal. It would lead to a safer and more robust market.” However, the other side of the argument was articulated by Tim Furey, COO at Goldman Sachs Electronic Trading, he told Traders Magazine, “We will accept market orders, and they will stay market orders if that is the client’s intention. So market orders do exist electronically.” Furey continued, “There has been a lot of debate around market orders. Do you automatically put a limit on it? Clearly that is not completely accepted by the buyside. Still, orders worked by algorithms and smart order routers at Goldman are sent out as limit orders.”

Will market orders go the way of the dinosaur? It is a distinct possibility. Time will tell.

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