Orders for securities are requests to buy or sell them sent by investors to brokers and/or market makers at an exchange. Order flow refers to how regularly securities are bought and sold over a period on the exchange - important for both market makers' cash flow and for traders looking for a market edge.
Market or limit
There are two types of orders in exchange trading depending on whether price or timing is the key factor spurring the transaction. Market orders aim to get the current market price as quickly as possible, almost guaranteeing they will be fulfulled but at the risk of paying a quite different price to that quoted when the investor made the order. Limit orders are more concerned with the final price of the security and so allow traders to set upper limits on buy orders and lower limits on sell orders, although the limits can sometimes mean that the transaction is never executed. Some commentators have equated market orders to online auctioneer eBay's 'Buy it now' button compared to its regular 'maximum bid' auctioning modeled on a market's limit order.
Watching the order flow
Maintaining a strong and regular order flow is so important to market makers, specialists and exchanges that they sometimes pay brokers for order routing - steering customer orders their way. Some smaller exchanges like the Philadelphia Stock Exchange (PHLX) actively encourage such payment for order flow deals between brokers and specialists because, as explained by PHLX chairman and CEO Meyer S. Frucher, they believe it encourages competition. Academic researchers, however, tend to conclude that payment for order flow creates conflicts of interest among brokers and dealers and harms investors. The Securities and Exchange Commission (SEC) allows payment for order flow but requires every broker and dealer to disclose payment quarterly.
Successful traders learn to track daily order flow to improve their results. Some use information on support and resistance levels from the trading floor to determine which trades to make and where to set profit targets and stop/loss triggers. One expert recommends traders follow changes in a contract's order book, which show the contract's best five bid (buy order) and offer (sell order) prices, to gauge a market's short-term future direction.
- Market Order. SEC.
- Limit Orders. SEC.
- Market Orders and How They Work. StockTradingToGo.com.
- An Exploration Of Exchange-Sponsored Payment For Order Flow And Specialist-Sponsored Payment For Order Flow. Philadelphia Stock Exchange.
- Does Payment For Order Flow To Your Broker Help Or Hurt You?. Journal of Business Ethics.
- Securities Exchange Act of 1934 Rule 10b-10 -- Confirmation of Transactions. The University of Cincinnati College of Law.
- Reading Order Flow. The Marlin Letter Inc..