A discretionary order is a trade instruction that gives a broker or trading system limited authority to change the order’s execution details (generally price and timing) within a pre‑specified range. It is sometimes called a “not‑held” order when the broker is permitted to exercise judgment about when and how to place the trade. The investor sets the core conditions (order type, limit price or stop trigger, and a discretionary amount) and the broker may alter the effective execution price within that discretionary band to increase the chance the order will fill.
How it works (key points)
– Discretionary amount: a small allowance (typically quoted in cents or ticks) the client permits the broker to move the order price.
– Direction matters: for buy limit orders the discretionary allowance lets the broker raise the buy price up to the limit plus the allowance; for sell limit orders it lets the broker lower the sell price down to the limit minus the allowance.
– Order duration: discretion can be applied to day orders or to GTC (good‑til‑canceled) orders that remain active until canceled.
– Order types: discretionary components are most commonly added to limit and stop (stop‑loss) orders to improve execution odds.
– Execution responsibility: broker‑dealers typically monitor discretionary orders and are expected to seek the best price consistent with the customer’s instructions and applicable regulatory obligations.
Worked numeric examples (assumptions stated)
Assumptions: stock is trading in dollars and cents; discretionary amount specified is $0.10.
1) Buy limit with discretion
– Market price: $22.00
– Buy limit price: $20.00
– Discretionary amount: $0.10
– Allowed execution range: $20.00 up to $20.10 (limit + discretionary).
If the market falls to $20.08, the broker can submit and execute the order at $20.08. If the market reaches $20.12, the broker cannot execute above $20.10.
2) Sell limit with discretion
– Market price: $22.00
– Sell limit price: $24.00
– Discretionary amount: $0.10
– Allowed execution range: $23.90 up to $24.00 (limit − discretionary up to limit).
If market moves to $23.95, the broker can submit and execute at $23.95. The broker may not sell below $23.90.
Checklist — what to specify when placing a discretionary order
– Order type: limit, stop, stop‑limit, etc.
– Core price or trigger: the limit price or stop trigger.
– Discretionary amount: specify the exact amount (e.g., $0.10 or number of ticks).
– Order duration: day order vs. GTC.
– Consent and documentation: confirm any “not‑held” or discretionary authorization required by your broker.
– Maximum acceptable slippage: set the discretionary amount consistent with the most loss you’re willing to tolerate.
– Monitoring and reporting
How brokers typically monitor and report discretionary orders
Brokers capture execution details in real time: time stamps, executed price(s), venue, and any partial fills. For phone or manual desk orders they should still generate an electronic order ticket and provide an execution report (trade confirmation) showing the price and quantity filled. Clients should reconcile confirmations against their instructions and keep records for at least the period required by their local regulator.
Action checklist for monitoring and post‑trade reporting
– Verify the execution report immediately (price, size, venue, time).
– Confirm the executed price lies within the discretionary range you authorized.
– If the order was “not‑held” (broader discretionary authority), confirm which specific decisions the broker made (timing, routing, price) and why.
– Request voice recordings or written notes if the order was placed by phone and you need evidence for disputes.
– Reconcile fills against your trading log and note any slippage for performance measurement.
Worked numeric examples
Example A — Buy limit with discretionary amount
– Instruction: Buy up to 1,000 shares with a limit price of $50.00 and a discretionary amount of $0.20.
– Allowed execution interval: $50.00 up to $50.20 (a buyer is willing to pay up to limit + discretionary).
– If market offers liquidity at $50.12, broker may execute at $50.12.
– Effective cost per share = $50.12; total cost = 1,000 × $50.12 = $50,120.
Example B — Sell limit with discretionary amount
– Instruction: Sell 500 shares with a limit price of $30.00 and a discretionary amount of $0.10.
– Allowed execution interval: $29.90 up to $30.00 (seller will accept down to limit − discretionary).
– If market bids $29.95, broker may sell at $29.95.
– Proceeds = 500 × $29.95 = $14,975.
How to calculate slippage and percent slippage
– Signed slippage (per share) = Executed price − Reference price.
• For buys, positive slippage means you paid more than the reference.
• For sells, positive slippage can be defined as reference − executed price (if you prefer “worse than reference” positive).
– Percent slippage = (Executed price − Reference price) / Reference price × 100%.
Worked numeric slippage (from Example A):
– If reference price = $50.00 and executed = $50.12:
• Slippage per share = $0.12.
• Percent slippage = $0.12 / $50.00 × 100% = 0.24%.
Practical best practices when using discretionary orders
– Limit the discretionary amount to the smallest practical tick size consistent with your execution needs.
– State explicit, written consent for any “not‑held” instructions and define the scope (price only, price+timing, routing).
– Pair discretionary limits with a clear time in force (day vs. GTC) and a cancellation rule.
– Use reports and trade confirmations to measure whether the discretion produced price improvement versus explicit limits.
– Avoid giving open or vague discretion — specify the maximum slippage you accept.
Advantages and disadvantages (concise)
– Advantages: Potential for better execution than a strict limit if
if the market moves slightly in your favor or the broker can access an alternative liquidity pool. It can reduce the need for continuous manual order updates and sometimes capture price improvement inside the spread.
• Disadvantages: Raises the risk of executing at a price worse than you intended if discretion is too large or poorly constrained. Discretion can create audit, compliance, and best‑execution concerns if it’s vague or undocumented. It may increase information leakage (other market participants inferred intent), and it can be misused by inexperienced or conflicted agents.
Practical checklist before using discretionary orders
1. Define your objective. Are you seeking potential price improvement, faster execution, or simpler routing?
2. Set a firm maximum discretionary amount. Express it in absolute dollars per share and in ticks; keep it as small as practical.
3. Specify time in force. Decide whether discretion applies only for the trading day or until cancelled (GTC).
4. Document authorization. Obtain and record explicit written consent for any “not‑held” or discretionary instructions; state scope (price only; price + timing; routing).
5. Set cancellation and re‑quote rules. Define when discretion expires and when to notify or cancel.
6. Limit use by liquidity. Avoid wide discretion in thinly traded or highly volatile names.
7. Post‑trade review. Measure execution performance vs. explicit limits and report results.
8. Comply with firm/regulator rules. Ensure the broker’s procedures and your order ticket properly mark the order as discretionary or not‑held.
Worked numeric example (illustrative)
Assumptions: US equity; tick size = $0.01; you want to buy with a limit of $50