By Levan Putkaradze
By Constantine Belov

When is The Right Time to Use Immediate-Or-Cancel Order in Trading?

When is The Right Time to Use Immediate-Or-Cancel Order in Trading?

The trading landscape has come a long way, from simple purchase orders and bids to acquiring various stocks and other commodities. In our modern setting, the trading profession features numerous new tools, concepts, and ideas that must be studied to succeed. 

Immediate or cancel (IOC) orders are among the most valuable trading tools, allowing traders to promptly simplify their processes and close trading positions. 

This article will discuss the nature of IOCs and why they make an excellent addition to any trader’s toolbox

Key Takeaways 

  1. IOC orders are trading tools that allow traders to execute deals immediately. 

  2. IOCs prioritise time over everything else, either fulfilling orders when issued or not at all. 

  3. IOC orders are great for making swift trades in a fast-paced trading environment. 

What Does an Immediate or Cancel (IOC) Order Stand for? 

Immediate or cancel orders are time-sensitive tools that allow traders to execute positions immediately after placing orders. Naturally, achieving a position immediately might be impossible, as there might not be enough sellers on the market. So, what happens if an IOC order can’t satisfy the entire position? It gets automatically cancelled, even with partial execution. 

IOC orders are designed to limit risks in volatile markets and provide safeguards against purchasing assets for an undesirable market price. Thus, IOC orders are not about executing the entire order and the open position. IOCs serve to execute a maximum portion of a given position and close immediately after doing so. Any unfilled portion is neglected, as IOC orders aren’t constructed to care about the volume. 

How Does the IOC Order Work in Practice?

While the nature of IOC orders might be puzzling at first glance, it is much more understandable with a well-placed example. Let’s look at investor X, who plans to purchase several stocks during the trading hours. Currently, investor X aims at Google stocks, wishing to purchase 1,000 shares as soon as possible. However, time is of the essence for investor X, as they prioritise buying stocks swiftly instead of fulfilling an entire order. 

Thus, investor X can place an IOC order on Google stocks. Suppose the market only offers 800 shares of Google at a price of $200 per unit. Due to the nature of the IOC order, all 800 shares will be purchased immediately, and the position will be automatically closed. As a result, investor X got the best outcome for their purposes, as the order was executed immediately. 

Now, let’s imagine a more complex scenario. Investor X wants to purchase the same 1,000 Google stocks but at a price of $199. The digital order book only offers Google stocks at a market price of $200. However, in several hours, the price of Google stocks dips to $199, creating a window of opportunity for investor X. Despite pinpointing the desired selling offer, the IOC order is long closed, as it prioritises immediate execution. Since the opening price for Google stocks was $200, the IOC order closed immediately due to unfulfilled conditions. 

This simplified example shows the most essential aspect of IOC orders – time sensitivity. The trading environment is highly volatile and fast-paced, so the IOC orders are strictly designed to be executed without any delays. Due to this setup, IOC orders don’t care about favourable prices or quantities. Time is the only significant variable here. 

Advantages of IOC Orders

The essential nature of IOC orders might not be readily apparent to newcomer investors. After all, the stock market is not about being the fastest player in the game, and diligent decisions should take precedence. Then, why are IOC orders so crucial for traders?  To understand the significance of IOC orders, it is essential to grasp the nature of the stock market trading itself. Let’s explore further. 

Immediate-Or-Cancel Order in Trading

Capitalising on Market Opportunities

First, the stock market is about taking advantage of price movements and placing a market order when the market value is relatively low. However, the window of opportunity is always very slim and most valuable stock options will offer profitable prices in severely limited periods. Thus, the most important variable here is the speed of execution. Even the most experienced traders will receive slim profits if they cannot purchase and sell stocks promptly. 

So, many investors require an IOC limit to move quickly and save as much time as possible. It is important to remember that every investment decision is relevant in a specific time window. If that window passes, purchasing the same stocks might even become risky for a given trader, as they stand to lose money on investment. Since IOC orders get automatically cancelled if the desired price isn’t matched, they are a perfect mechanism to control opportunity windows. Sometimes, the best trades are the ones that investors don’t make, and IOC orders often ensure that. 

Partial Execution

Additionally, IOC orders help investors capitalise on their strategies even if the entire order can’t be fulfilled simultaneously. For example, if a given investor seeks to purchase 1,000 stocks at a particular price, the market might only offer 500 at a specified moment. IOC orders ensure that investors can fulfil at least a portion of their desired strategies and not miss out on the whole thing due to market inefficiencies.

Fill or Kill Order VS Immediate or Cancel Order

There are numerous trading mechanisms similar to the IOC orders on the trading market, including Fill-Or-Kill (FOK) orders, All-Or-None (AON) and Good-Til-Cancelled (GTC) orders. While all instruments are popular, the FOK order is the direct competitor of the IOC order, as it presents the polar opposite trading option. This order is concentrated on filling the entire trader position. 

Immediate-Or-Cancel Order in Trading

Thus, if investor X wants to purchase 1,000 shares and places a FOK order, the position will be open until the full extent of desired stocks becomes available. So, FOK and IOC orders have dramatically different use cases in the trading realm. Whereas IOC prioritises time, FOK focuses on the orders' completeness.

How To Correctly Utilise the IOC Order?

Immediate-Or-Cancel Order in Trading

So, after discussing the nature of IOC orders, the logical question is whether newcomer traders should experiment and interact with this mechanism. The simple answer is yes! IOC orders are vital in the trading landscape, and it is essential to understand them inside and out. However, newcomer investors should treat this instrument carefully, as it could easily yield unfavourable results in the wrong hands. 

Thus, correctly utilising IOC orders is about biding your time and selecting a diligent limit price. It is important to remember that the IOC orders get executed immediately, meaning there is no room for speculation or unjustified optimism. Prices should be placed carefully, and the amount of stocks should be considered wisely. After all, IOC orders are not foolproof, and traders might find themselves with an undesirable package.

Final Thoughts

IOC limit order is one of the most critical, valuable and frequently used mechanisms in the trading landscape. This instrument allows traders to act swiftly and capitalise on time-sensitive opportunities without missing a beat. However, it is crucial to approach IOC orders cautiously, as they are immutable and could cause losses without careful consideration.

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