Order Types

Market Participant Groups Orders and Execution Systems

One of the major changes to the Market Structure in the past few years is the variety and types of ORDERS that each Market Participant Group is able to use. Unfortunately Retail Traders are still far behind the Professionals, in terms of types and varieties of orders they can use.

Let’s review some of the elements of Order Types that the Professional side of the market uses, that most of the retail side of the market has never heard of before.

The Buy Side Institutions have their own set of orders and it is a huge number by comparison to the retail crowd, however most are predominantly based on some variation of Time Weighted Average Price TWAP. Giant Buy Side Institutions rarely use Volume Weighted Average Price VWAP, because of the risk of this type of order triggering on High Frequency Trading HFT automated millisecond orders. The largest Buy Side Institutions have floors of Traders executing orders on the fund’s behalf. For example a Risk Adjustment Order may include any or all of the following Max Order Quantity, Max Day Quantity, Max Day notional value, Max order notional value, Reject pre-open orders, Kill Switch.

They use over the counter Alternative Trading System ATS venues called “Dark Pools,” which are revealed by the Balance of Power BOP Indicator.

VWAP is used mostly by the Smaller Funds which have limited market experience, depend on the parent company or franchise to provide them with stocks and funds to sell to their Retail Mutual Fund Investors, and generally are limited in what they can do. The Smaller Funds tend to trade the exchanges.

Limit Orders are used primarily by Retail Traders. Professional Technical Traders have a wide variety of Order Types they use depending many factors including upon the market and trading conditions, their intent for the trade, whether it is portfolio adjusting for the Institution they work for, or short term hedge trading.

Professionals have several dozen various types of orders they can use individually or in combination. The complexity of some of the orders combined in a certain fashion is well beyond the capabilities of trade management for most Retail Traders who lack the education and experience of Professional Traders.

As an example, Professionals may use up to a 10 leg complex order for Options, Stocks, and Exchange Traded Funds ETFs while a Retail Trader rarely uses any combination orders.

As Order Types become far more complex on the Professional side, it impacts technical and chart patterns.

The next TechniTrader Reviews article will be about how Order Types from the Professional side of the market alter the technical patterns Retail Traders depend upon. We will review how Dark Pool order types and complex orders affect the trend, trendline patterns, and candlestick patterns. For more information about Dark Pools email info@technitrader.com for a link to our “Tracking the Dark Pools Webinar.”

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