What is a discretionary order?

An order condition that allows a broker some discretion over how it is executed—when, how much, and so forth—is known as a discretionary order. Another name for a discretionary order is a not-held order.

Understanding Discretionary Order

Generally speaking, a discretionary order is one that a broker or other expert in the financial markets may issue and process without the customer’s express acknowledgment. These orders might expand the parameters of the common kinds of conditional declarations to increase the probability that a decree will be carried out. Discretionary directives also enable the investor to impose specific dependent constraints while increasing the likelihood of order execution.

Conventional forms of conditional orders may contain an extra element of discretion. Adding the discretionary component to limit and stop loss orders is customary. This fundamental order clause allows the investor to add a wiggle room in their order amount. As a result, if a broker is allowed discretion over a limit order, the broker may decide to adjust the limit price upon receipt of the order based on market activity and liquidity.

Using a broker or electronic trading platform, discretionary orders can be placed. In any scenario, the investor sets a conditional order with a discretionary amount with a broker-dealer. Usually expressed in pennies, the discretionary amount allows the charge to be completed with extra flexibility above and beyond the requirements. These orders are seen as unique by broker-dealers who monitor them for submission. Broker-dealers will aim to submit orders based on the best pricing for the client.

Discretionary orders are subject to broker-dealer allowances. If provided, they may typically be added to all sorts of orders. In rare circumstances, an investor may add a discretionary amount to a single-day order. Good ’til canceled (GTC) charges open indefinitely unless the investor withdraws them. They can also include discretionary amounts.

Discretionary Order Examples

Many investors add a discretionary amount to ordinary buy-and-sell limit orders. Limit orders are the most basic conditional orders, enabling investors to set a specific price at which they desire to purchase or sell a security. Buy-limit order prices will be below the market price, and sell-limit orders will be above the market price.

An investor might designate an execution price below market value in a discretionary buy limit order. Additionally, this investor would select a discretionary amount via their broker, either directly or through their trading system. An investor would aim to purchase the asset at $20 but would accept a buy order price of $20 to $20.10 if they placed a buy limit order of $20 on a stock now trading at $22 with a discretionary amount of 10 cents. The investor would put in and execute this order if the price dropped below $20.10.

The investor would specify a price above the market to execute a discretionary sell limit order. Along with their order, this investor would also provide a discretionary amount. An investor may file and execute a sell order at $24. If the stock is presently trading at $22, and the investor has a 10-cent discretionary amount, the order may be executed at a selling price of $23.90 or more.

Managing Discretionary Investments

Under discretionary investment management, a portfolio manager or investment counselor makes buying and selling decisions for a client’s account. The portfolio manager has the last say in overall investment choices, which is why “discretionary” is used. In other words, the customer has to have complete faith in the investment manager’s competence.

Only those with significant educational qualifications and a great deal of experience in the financial field are eligible to provide discretionary investment management. Typically, high-net-worth customers with a sizable amount of investable assets are the only ones suitable for discretionary investment management.

These customers must have a discretionary account, which is an investment account that gives an authorized broker the right to purchase and sell stocks daily without the client’s approval. As proof of the client’s approval, they must additionally sign a discretionary disclosure with the broker. Discretionary accounts are also managed funds; most brokerage firms have minimum customer requirements (like $250,000) to provide this service, and the fees typically range from 1% to 2% of assets under management (AUM) annually.

Conclusion

• Orders classified as discretionary allow a broker to act on behalf of a client with some degree of discretion without the customer’s specific consent for every choice or aspect of the order.
• Conditional orders often involve discretion, such as adjusting the limit price in reaction to changing market circumstances.
• Another essential element of discretionary investment management is discretionary orders, which allow a broker or adviser to trade on a client’s behalf without consulting them on every decision.
• As long as the broker uses discretion to achieve optimum execution, they are released from liability for any possible losses their client may incur.