Firm Order 

Understanding various order types is crucial for effective decision-making in trading and investments. One such order type is the firm order, which is significant across financial markets. This article aims to provide a comprehensive overview of firm orders, their types, associated risks, and real-world examples. 

What is a Firm Order? 

A firm order is a definitive instruction an investor or trader gives to buy or sell a security at a specified price. It remains active until it is executed or explicitly canceled. This order indicates a strong commitment to the transaction, as it is not subject to further confirmation or negotiation once placed. A firm order obligates the broker or trading platform to execute the trade under the predefined conditions, ensuring that the investor’s intentions are clear and binding.

Understanding Firm Orders 

To fully grasp the concept of firm orders, it’s essential to delve into their characteristics and how they function within the trading environment: 

• Binding Commitment: Once a firm order is placed, it represents a binding commitment to execute the trade as per the specified terms. This means the order will remain active until it is either fulfilled or canceled by the investor. 

• Execution Assurance: Firm orders assure execution, designed to be carried out when the market conditions meet the specified criteria. This is particularly beneficial for investors seeking to enter or exit positions at predetermined prices. 

• Applicability Across Markets: Firm orders are utilised across various financial markets, including stocks, commodities, and foreign exchange (forex), making them versatile tools for traders and investors. 

Types of Firm Orders 

Firm orders can be categorised into several types, each serving specific trading strategies and objectives: 

• Market Order

A market order is an instruction to buy or sell a security immediately at the best available current price. Market orders are executed promptly, ensuring quick entry or exit from a position. However, the exact execution price may vary, especially in volatile markets. 

• Limit Order

A limit order specifies the maximum price an investor is willing to buy or the minimum price at which they are eager to sell a security. This order type ensures that the trade is executed only at the desired price or better, providing control over the execution price. 

• Stop Order (Stop-Loss Order)

A stop order, commonly known as a stop-loss order, is designed to limit an investor’s loss or protect a profit on a security by triggering a market order once the security reaches a specified price, known as the stop price. 

• Fill or Kill (FOK) Order

A fill or kill (FOK) order mandates that the entire order must be executed immediately in full or not at all. If the order cannot be filled promptly, it is canceled entirely. 

• Good ’Til Canceled (GTC) Order

A good ’til canceled (GTC) order remains active until the investor decides to cancel it or the order is executed. This type of order does not expire at the end of the trading day, providing flexibility for investors who are not in a hurry to execute their trades. 

• Day Order

A day order is valid only for the trading day it is placed. If the order is not executed by the end of the trading session, it expires automatically. 

Risks & Challenges of Firm Orders 

While firm orders offer investors control and flexibility, they also come with certain risks and challenges: 

• Price Slippage

Price slippage occurs when there is a difference between an order’s expected execution price and the actual price at which it is executed. This is particularly common in fast-moving or volatile markets, where prices can change rapidly. 

• Non-Execution Risk

A non-execution risk arises when a firm order is not executed due to market conditions. This is particularly relevant for limit orders, where the trade will only go through if the market price reaches the specified level. 

• Partial Fills

A partial fill happens when an order is only partially executed due to insufficient liquidity in the market. This means the trader does not get the entire quantity of shares or contracts they intended to buy or sell. 

• Execution Delays

During periods of high trading volume, execution delays can occur, especially for large orders or in illiquid markets. Delays may impact the final trade price, particularly for market orders. 

Examples of Firm Orders  

To understand firm orders better, look at real-world examples from the US and Singapore markets. 

Example 1: Market Order on NASDAQ 

A trader wants to buy 300 shares of Tesla Inc. (TSLA) as quickly as possible. They place a market order on NASDAQ, ensuring the trade executes instantly at the best price. 

If the stock is currently trading at US$800 per share but jumps to US$805 at the moment of execution due to market volatility, the trader will purchase the shares at US$805 each. 

Example 2: Limit Order on the Singapore Exchange (SGX) 

An investor wants to buy shares of DBS Group Holdings Ltd., a leading financial services group in Singapore, but only if the stock price reaches SGX 30 or lower. 

They place a limit buy order on SGX for SGX 30 per share. The order remains open until the market price drops to SGX 30, at which point it is executed. If the stock price stays above SGX 30, the order remains unfilled. 

Frequently Asked Questions