Not held order: Meaning, Criticisms & Real-World Uses

What Is Not Held Order?

A "not held order" is an instruction given by an investor to a broker-dealer that grants the trader discretion over the precise time and price of an order's execution. Unlike a "held order," where the broker must execute the trade immediately at the prevailing market price or a specified limit, a not held order allows the broker to "hold" the order and use their judgment to achieve the most favorable execution price throughout the trading day. This type of instruction falls under the broader category of securities trading and reflects a degree of trust placed by the client in the broker's expertise regarding market conditions. The phrase "not held" explicitly informs the broker that they will not be held responsible for missing a specific price or time of execution, as they are being granted flexibility to optimize the trade.

History and Origin

The concept of a not held order has evolved alongside the development of financial markets and the changing dynamics of the broker-client relationship. Historically, as trading moved from physical trading floors to more electronic trading systems, the speed and complexity of order execution increased. Early brokerage practices often involved a high degree of discretion, but as markets became more regulated and transparent, the need for clear instructions and accountability became paramount.

The formalization of "not held" instructions emerged as a way to balance the client's desire for optimized execution with the practicalities of trading in dynamic markets. Brokers, particularly those handling large or complex orders for institutional investors, require latitude to work an order without being constrained by momentary price fluctuations. This flexibility allows them to manage order flow and seek better terms, reflecting an understanding that immediate execution might not always yield the best overall result, especially for significant block trades. The continuous evolution of regulatory frameworks, such as the Securities and Exchange Commission's (SEC) Regulation Best Interest, underscores the ongoing focus on ensuring that even with discretionary orders, brokers uphold their obligations to act in the customer's best interest.³

Key Takeaways

A not held order grants the broker discretion over the timing and price of execution, aiming for optimal results over the trading session.
The investor relinquishes the right to hold the broker accountable for missed prices, acknowledging the broker's judgment in dynamic markets.
These orders are commonly used for large orders or in volatile markets where precise timing is crucial for favorable execution.
Brokers handling not held orders must still adhere to their overarching best execution obligations, seeking the most advantageous terms available.
The nature of a not held order contrasts with "held orders" like market orders, which demand immediate execution.

Interpreting the Not Held Order

When an investor places a not held order, they are essentially giving the broker the ability to exercise professional judgment in seeking the optimal transaction price. This implies that the broker will consider various factors, such as current liquidity, market depth, and prevailing supply and demand, to decide when and how to execute the order. For example, if a large order is broken into smaller pieces to minimize market impact, it would typically be a not held order. The interpretation is that the client prioritizes achieving a better average price over a guaranteed immediate fill at the current quote, recognizing that such optimization may take time and involve active management by the broker.

Hypothetical Example

Consider an investment fund that wants to purchase 100,000 shares of XYZ Corp. The current market price is $50.00 per share. If the fund manager gives a "market order" to their broker, the broker would immediately execute the order at the best available price.

However, if the fund manager places a "not held order" for 100,000 shares of XYZ Corp. at "about $50.00," they are giving their broker discretion. The broker might observe that the stock tends to dip to $49.90 at certain times of the day or that large sellers often appear later. The broker could then strategically buy smaller blocks of shares throughout the day, perhaps getting 20,000 shares at $50.00, 30,000 shares at $49.95, and 50,000 shares at $50.10, resulting in an average cost basis that the broker believes is better than an immediate fill. The fund manager, by giving the "not held" instruction, cannot complain if the broker misses a brief dip to $49.80, as the broker was granted the flexibility to achieve the overall best result.

Practical Applications

Not held orders are widely applied in institutional trading and for sophisticated individual investors who seek professional order execution management. They are particularly common in scenarios involving:

Large Block Trades: When an institutional trader needs to buy or sell a substantial number of shares, placing a not held order allows the broker to "work" the order, gradually executing it over time to minimize market impact and potentially achieve a better average price.
Volatile Markets: In periods of high volatility, prices can fluctuate rapidly. A not held order permits the broker to wait for more stable conditions or temporary price improvements rather than being forced to execute at a disadvantageous moment.
Algorithmic Trading Strategies: While distinct, the principles of a not held order align with the flexibility sought in certain algorithmic trading strategies, where algorithms are given parameters but have discretion over the precise timing of individual trades within those parameters.
Compliance with Best Execution: Despite the discretion, broker-dealers are still obligated to seek the most favorable terms for their customers' orders under prevailing market conditions, a principle known as best execution.² This regulatory requirement ensures that the discretion granted by a not held order is not abused, and firms must regularly review their execution quality.

Limitations and Criticisms

While not held orders offer flexibility, they come with certain limitations and have faced criticism, primarily concerning the potential for conflict of interest and the challenge of truly verifying best execution.

A primary criticism stems from the inherent discretion granted to the broker. While the intent is to achieve an optimal price, the lack of a precise execution time or price can make it difficult for investors to definitively assess whether their broker truly achieved the best possible outcome. This challenge is amplified in complex market environments or where the broker also acts as a principal trade in the transaction, creating a potential conflict of interest. Regulatory bodies like FINRA and the SEC have emphasized that brokers must have policies and procedures in place to ensure best execution, even for discretionary orders.¹

Moreover, the "not held" instruction doesn't absolve the broker of general diligence. Instances have occurred where brokers were fined for failing to meet their best execution obligations even with not held orders, often due to inadequate systems for evaluating market conditions or prioritizing internal payments over customer interests. For example, a prominent brokerage was fined for allegedly failing to ensure its customers received the best price for orders, routing orders based on payments from market makers rather than execution quality. Bloomberg News This highlights the ongoing regulatory scrutiny and the importance of robust risk management and compliance frameworks for firms handling such orders. Further research into market structure and efficiency is continuously conducted by institutions such as the Federal Reserve Bank of St. Louis to understand the impact of various trading practices.

Not Held Order vs. Best Execution

The terms "not held order" and "best execution" are closely related but represent distinct concepts in financial markets. A not held order is a type of instruction from a client to a broker, giving the broker discretion over the timing and price of a trade's execution to seek a better overall outcome. It specifically means the broker is not held to an immediate execution at the current market quote.

In contrast, best execution is a regulatory obligation that requires broker-dealers to use reasonable diligence to ascertain the best market for a security and execute customer orders so that the resultant price is as favorable as possible under prevailing market conditions. This obligation applies to all customer orders, including not held orders, limit orders, and market orders. While a not held order grants the broker flexibility, it does not relieve them of their fiduciary duty or the regulatory requirement to achieve the best execution reasonably available. The key difference is that "not held" defines the type of instruction, while "best execution" describes the standard of care that must be applied regardless of the instruction type.

FAQs

Q1: What is the main purpose of a not held order?

A1: The main purpose of a not held order is to give a broker the discretion to choose the optimal time and price to execute a trade throughout the day, aiming for a better overall average execution price rather than an immediate fill.

Q2: Who typically uses not held orders?

A2: Not held orders are primarily used by institutional investors and sophisticated individual traders who are placing large orders or trading in volatile markets where flexibility in execution is crucial to minimize market impact and optimize price.

Q3: Does a not held order mean the broker has no responsibility for the trade?

A3: No, while a not held order grants the broker discretion over timing and price, it does not absolve them of their fundamental best execution obligation. Brokers must still use reasonable diligence to achieve the most favorable terms for the customer under prevailing market conditions, as mandated by regulatory bodies like FINRA.