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Introduction
This document is designed to help you understand margins and the various types of orders and how to place them. Should you have any questions about order placement or indeed any aspect of trading, please contact your Account Executive on:
+44 (0)20 7144 5500
Click here to dowmnload our PDF guide to understanding Statements.
1. Margins - A Basic Introduction
2. Futures Orders
3. Order Details
4. Order Definitions
5. Other Order Instructions
Margins - A Basic Introduction
Initial margin is the amount of money required to open a derivatives position, whether in futures, forex or CFDs. It is in effect a security deposit to ensure that traders have sufficient funds to meet any potential loss from a trade. When a position is closed out or settled money deposited by way of margin is returned, plus or minus any resulting profit or loss.
If a position involves an exchange-traded product, the amount or percentage of initial margin is set by the exchange concerned. However brokerage firms often require a larger amount of margin than that set by the exchange. In times of market volatility margin requirements can change quickly.
If a position is making a loss and the value of the initial margin is being eroded, the broker will make a margin call in order to restore the amount of initial margin available. Often referred to as “variation marginâ€, margin called for this reason is usually done on a daily basis, however, in times of high volatility a broker can make a margin call or calls intra-day.
Calls for margin are usually expected to be paid and received on the same day. If not, the broker has the right to close sufficient positions to meet the amount called by way of margin. After the position is closed-out the client is liable for any resulting deficit in the client’s account.
Some US Exchanges also use the term “maintenance marginâ€, which in effect defines by how much the value of the initial margin can reduce before a margin call is made. However, most non-US brokers only use the term “initial margin†and “variation marginâ€.
Consider the example below:
A gold futures contract of 100 ounces with an initial margin of $3000:
Day 1
A client lodges $3000 margin and buys a June gold future at a price of $920 per ounce. (every $1 movement in the price of gold generates a profit or loss of $100)
Gold closes the day at $915.00, which means the client is losing $500.
Day 2.
The broker makes a margin call for $500 and expects to receive funds on the same day.
Three scenarios:
- The client pays his margin call and on day 2 gold closes at 918. In this case the client now has $300 surplus in his account
- The client does not pay his margin call and on day 3 the broker sells out the contract at 910. The client is debited $1000 and now has a balance of $2000
- The client does not pay his margin call but promises to meet the call on day 3. The broker uses his discretion to give the client an extra day to pay. On day 4 the price drops to $880 and no margin has been received. The broker closes out the trade creating a loss of $4000. The client is now left with a $1000 deficit in his account (i.e. initial margin $3000 less loss of $4000) for which he is legally liable to pay.
In addition to the above information, you are advised to carefully read the risk disclosure statement and associated documents issued to you regarding your account. Should you not understand any aspect of the trading you intend to undertake or the financial consequences of doing so you should consult with an independent financial adviser.
The Process of Placing Orders
Before considering specific types of orders, it is valuable to understand the general procedure:
FUTURES ORDERS
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- Telephone the trading desk
direct. Order Specialists are there to deal with your call. Your very first step will be
to identify yourself using your account number and name.
- Give your order. We would suggest that you have the order written
down on an ‘Order Placement Sheet',
which you can download. This will help ensure that you will be
more confident in what you are saying and be able to provide all
the correct information in the right order. The Order Specialist
will then repeat your order back and ask you if this is correct.
Although all of our Order Specialists are trained to deal with
novice and expert customers there is the chance that they may
speak more quickly than you are prepared for. If you are unsure
that the details are correct, ask for it to be repeated, more
slowly. Only when you are satisfied that the order has been repeated
correctly, should you say it is correct.
- The order is then
transmitted to either the floor or an electronic exchange. If it is a market order (i.e.
you want to trade NOW), then under normal circumstances, you may hold whilst the Order
Specialist places the order
- You receive the fill price
(the best price we have managed to obtain in the market) from your Order Specialist. If
however, it is another kind of order (see order definitions) then the conversation
finishes after you have confirmed the order with the Order Specialist.
- Your record. It is very
important to make a note of all your orders, recording the time, date, and the type of
order placed. You should check all fills given to you against your own record and the
written confirmation sent to you the next day.
The following outlines the order process in more detail:
ORDER DETAILS
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Let us say that you want to purchase for $22.00 per barrel, 5 contracts of June NYMEX Crude Oil
today. The current price stands at $22.35 per barrel which is higher than you are prepared
to pay.
This is how the order should be given, divided into its component parts:
|
John Miller
Account 123ABC
|
Buy
|
5 |
June ‘2001 |
NYMEX Crude Oil at |
$22.00 |
Limit |
Day order |
(1) |
(2) |
(3) |
(4) |
(5) |
(6) |
(7) |
(8) |
- State your name and account
number.
Do not assume that the Order Specialist knows who you are.
- State whether this order is a buy or sell.
The Order Specialist’s order
ticket is divided in two halves; one side is for buy orders and one side is for sell
orders. Until the Order Specialist knows what side to write your instruction on, he cannot
take your order. ECN Brokers Direct recommends that you repeat this part of the order to ensure
complete agreement on this point by both you.
- State the quantity.
- State the delivery month.
Many contracts including Crude Oil are deliverable this year and also next year as well.
Therefore, it is good trading practice to state the month and also the year of the
contract that you wish to trade. ECN Brokers Direct recommend that because some months can sound
similar on the telephone, such as September and December, you elaborate by saying
September Labour Day and December Christmas to avoid any confusion.
- State the exchange and contract to be traded.
Although it can be obvious in many
cases, there are many similar or identical contracts that trade on at least two different
exchanges. Once again, it is good trading practice to specify the exchange as well as the
contract.
- State the price.
Specify the
price at which you want your order to be activated. ECN Brokers Direct recommend that for certain
numbers that sound similar to others, you clarify these: fifteen would be stated as
"fifteen, that is one five" and fifty would be stated as "fifty, that is
five zero".
- Order action.
Most orders are either:
- market orders;
- price orders; or
- a combination of the two
It is very
important that you state the type of order to ensure correct execution. In the Crude Oil
order example above, the client stipulated a "Limit Order". In the next section,
we describe the various applications for different restrictions you may wish to place on
orders.
8. State type of order.
Unless
stated differently most brokerage firms will assume the order will remain valid for the
day only. However, it is good practice to state whether it is a Day Order or a Good Till
Cancelled Order ("GTC"). (Also known as an Open Order) Let us consider the
differences.
Day Order.
This is good only for the trading session during which you placed it. If you place an
order between two of the sessions, the order will remain good for the next session only,
unless you specify otherwise.
Good Till
Cancelled Order ( "GTC" or Open order). This remains a working order until:
- it is filled;
- it is cancelled by you; or,
- the contract expires.
Many GTC orders only apply during open outcry trading and are not worked during electronic sessions.
Option Orders
The procedure for the placement of "Option Orders" is slightly different to a
futures order.
For example, consider buying "Call Options" with a "Strike Price" of
$20.00 on the June ’2001 NYMEX Crude Oil futures contract with a "Premium
Value" of $3.20:
John Miller Account 123ABC |
Option Order |
Buy |
5 |
June 2001 |
Strike 20 |
NYMEX Crude |
Calls |
Open |
Day Order |
(1) |
(2) |
(3) |
(4) |
(5) |
(6) |
(7) |
(8) |
(9) |
(10) |
The new points are outlined below:
(2) State that it is an option order.
This is now the first part of the instruction after you have identified yourself.
It signals your intentions to place an "Option Order".
(6) State the strike price you wish to trade.
If the option is exercised, the "Strike Price" identifies the price at which the
underlying instrument will be assigned. Even if a trader never intends to exercise his
option, it must have a " Strike Price."
(8) State whether the option is call or put.
(9) State whether this order is to open or to close.
When trading "Options" it is important to state whether you are opening a new
position or closing an existing position
ORDER DEFINITIONS
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Market Order
This is the most straightforward order there is. You do not specify a price but instruct the Order
Specialist to get the best available price now. If the trader is not prepared to wait for
Crude Oil to fall to $22.00/barrel and wants to get in immediately, the order would change
to:
John Miller, Acc 123ABC, Buy, 5 June @2001 NYMEX Crude Oil, at Market.
Note: Some electronic exchanges do not recognise market orders. To overcome this, many
electronic trading systems simulate a market order by placing a limit order well above or
below the last trade. In normal market conditions this practise works well, however in
fast market conditions some market orders can fail.
Market on Close ("MOC")
An MOC order is an instruction to fill the order, at market, but only in the closing range (the
range is determined by the individual exchanges).
Market on Open
It is an order that is to be filled in the official exchange opening range. If any part of the
order cannot be filled in this period, it will automatically be cancelled.
Limit Order
This is an order that you will use if you want to be filled at a certain price or better. If it is a buy limit,
the price of the order is given at or below the current market
price. If it is a sell limit, the price of the order is given
at or above the current market price. Generally you are guaranteed
a fill if the market trades through your price. However, if
the market just trades at your price, you are not guaranteed
a fill because there may not be enough trades occurring at your
price to ensure that your particular order will be traded.
Sometimes, you may wish to place a limit order
when the market is trading at or through your limit price. This
order will be flagged ‘Or Better’. The Order Specialist
will then be able to inform the floor broker of your intention.
Fill or Kill ("FOK")
An FOK order is an instruction to the broker
to immediately execute your order at a specific price or cancel
it if it is "unable" to be filled. The broker on receipt
of your order will immediately "Bid" (if it is a buy
order) or "Offer" (if it is a sell order) your price
at least three times. If a trade takes place, you will be notified
immediately of your fill price. If however no trade takes place,
the order will automatically be cancelled, or "killed".
The specified price must be close enough to the current market
price to make its execution a reasonable possibility. In our
example, the market is trading at $22.35 and our specified price
is $22.00. This, therefore, would not be a realistic alternative
to our normal limit order.
Market if Touched ("MIT")
An MIT order becomes a "Market Order"
if and when the market hits a specified price . Just like a
"Limit Order", a buy "MIT" is placed below
the current market price and a sell "MIT" is placed
above the current market price. However, unlike a "Limit
Order" the market does not need to trade through your price
to guarantee a fill. Additionally, there are no limitations
placed on the floor broker as to what price the order will be
filled. It may be at your price, better, or perhaps worse –
it has become a "Market Order."
Stop Order
This is an order that becomes a "Market
Order" when trading occurs at or through your specified
price. This differs from an "MIT" because a buy "Stop"
is placed above the current price and is triggered when the
market is bid at or above your "Stop" price. A sell
"Stop" is placed below the current market price and
is activated when the market is offered at or below your "Stop"
price.
Many traders refer to a "Stop Order"
as a Stop Loss, in recognition of its function of closing a
trade if the market price moves in the opposite direction to
the one a trader has anticipated. However, the "Stop Order"
can also be used to protect the profit of an existing trade
or to open a new position to buy "on strength" and
sell "on weakness."
Consider that the market price of Crude Oil
has fallen to $21.95 and our trader is now in the market. The
traders first concern will be to protect himself against a further
significant fall in the price. He will place a "Stop Order"
using it as a Stop Loss:
John Miller, Acc 123ABC, Sell, 5 June ’2001,
NYMEX Crude Oil, at $21.50 Stop. GTC.
At a later point in time, if the market moves
to $22.50, the trader might want to protect the profit that
he has already accrued and therefore, places a "Stop Order"
to protect most of the profit:
John Miller Acc 123ABC, Sell, 5, June ’2001,
NYMEX Crude Oil, at $22.40 Stop. GTC.
Note: It is at this point that the trader must
remember to cancel his previous order at $21.50 Stop. GTC.
It is also possible to use a stop order to
open a new position. When we first looked at the Crude Oil example
market the price was at $22.35/barrel. If the trader allows
the price to fall before buying his five contracts he is buying
a weak market. If, instead, he is looking for market strength
in the anticipated trading direction, he may well consider using
a "Stop Order" to enter "at market" if the
price moves to or above 22.40.
John Miller Acc 123ABC, Buy, 5 June ’2001,
NYMEX Crude Oil, at $22.40 Stop. Day Order.
Stop Limit Order
This is a variation of a normal "Stop
Order" and it instructs the filling broker that on a "stop"
being elected, to fill the order at the price or better. If
he is unable to do this immediately the order will become a
normal "Limit Order."
Stop Close Only Order ("SCO")
An SCO is a "Stop Order" that can
only be elected and filled in the closing range of the market
and will only be elected if the market has traded at or through
the price specified in the "Stop Close Only Order".
OTHER ORDER INSTRUCTIONS
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Spread Orders
This is an instruction to buy and sell the
same or related commodities in an attempt to take advantage
of the price differential.
Spread orders are entered using a "Market
Order" or at a specified "Premium" instead of
a price. A "Premium" is the difference in the two
prices of the two contracts with which a trader wants to become
involved. When giving an order, you must always state that it
is a "Spread Order". When placing this order, the
first part that is given is the "buy side". If the
order is not a "Market Order", the "Premium"
should be stated on the "higher priced side". The
filling broker will treat the "Premium" like a "Limit
Order" and almost always the "Premium" is indicated
on the higher priced "side" of the "Spread Order".
Let us consider an example using NYMEX Crude
Oil. The June contract is currently trading at $22.35/barrel
and the August is at $21.45/barrel. The difference between the
two contracts is $0.90; that is the "Premium". The
trader believes that over a period of time the difference between
the two contracts, or "Premium", will reduce in size.
Therefore, he will want to sell the higher priced contract and
buy at the lower priced contract. However, he believes that
the "Premium" may increase slightly before he is able
to take advantage of the anticipated decrease. The order that
he will give to the Order Specialist is this:
John Miller Acc 123ABC, Spread, Buy, 5, August
’2001, NYMEX Crude, and Sell, 5, June ’2001 NYMEX
Crude at a premium of $1.00 or more on the Sell Side day order."
It is important to remember certain features
of trading with "Spread Orders". Spreads are traded
separately from the regular market and the prices quoted may
not be identical in the two markets. It is, therefore, very
important to ask for a quotation before entering a "Spread
Order" especially if the spread that you are interested
in is thinly traded.
Note: We will not accept "Stop Orders" on spreads.
Cancel Replace
This order will be used when a trader wants
to change an existing order with respect to the price, action,
quantity or duration, or a combination of any of these. With
this order a trader cannot change the commodity or the month.
The trader informs the Order Specialist what the old order is
and that he wants a "Cancel Replace" and then states
the new instruction.
The advantage of this order is that it is impossible
to be filled on both the old and the new orders. If the trader
is too late in placing the "Cancel Replace" and the
old order will be filled, the new one will be automatically
cancelled and the trader will be notified of the fill. The disadvantage
with the order though is the time in which it takes the order
to be placed. Therefore, if it unlikely that the old order will
be filled and time is of the essence, it may be worth taking
a risk by placing the new order and then placing a "Straight
Cancel" on the old one.
One Cancels Other ("OCO")
An OCO order consists of two separate "Buy"
or "Sell" instructions. It cannot contain a "Buy"
and a "Sell". As soon as the filling broker executes
one portion of the order the second portion is cancelled. This
is a very useful instruction for a trader who wants the option
of placing a profit target whilst protecting the position with
a stop loss. If we consider that on the original order - Buy
5 June ’2001 NYMEX Crude Oil contracts, we anticipated
that the price would rise. If the market rises we want to take
the profit and if falls we want to cut our losses. This is an
ideal opportunity to use an "OCO". We want to take
profit using a limit order if the price rises to $23.00 and
to place a stop loss if the price falls to $21.50. Both orders
are "to Sell":
John Miller Acc123ABC, OCO, Sell, 5, June ’2001,
NYMEX Crude Oil, at $23.00 Limit OCO $21.50 Stop.
Not Held Orders
Often an order specialist will take an order
on a "Not Held" basis. This often occurs when the
exchange does not recognise a particular order and the order
specialist offers to work the order from the desk on a "Not
Held" basis. This means that the order specialist is prepared
to work the order as long as the trader acknowledges that if
the order is missed the order specialist has no liability to
provide a fill. In effect a Not Held order means an order is
only worked on the basis of best endeavour but no liability
is accepted if it is missed.
WARNING
The information contained in this article is
from sources generally considered reliable, however, ECN Brokers Direct
makes no guarantee, implied or explicit, as to its accuracy
or completeness. Types of orders accepted at various exchanges,
or on electronic trading systems, are subject to change without
notice. The Explanation of trade order types are given as guidance
only. It should be noted that definitions might differ from
exchange to exchange. ECN Brokers Direct takes no responsibility for
failure to complete an order due to a client's misunderstanding
or misinterpretation of market definitions.
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Click here to download an order record sheet.
FX in brief
Introduction:
The spot currency market is generally accepted as the largest and most liquid market in the world. It is an over-the-counter market and
is different from exchange traded products because it has no physical location or central exchange. Foreign exchange trading takes place
in the world’s major financial trading centers with the main centres being New York, London, and Tokyo. The large number of diversified
players makes it difficult for any one individual or organization to control the market.
Traders are attracted by the Monday/Friday 24 hour trading, the liquidity and general volatility. MTrade FX is a trading platform,
which gives 24hour access to the forex market.
Understanding a foreign exchange quote:
A forex quote is always a two-sided quote with a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency
(i.e. buy the second currency). The 'offer' is the price at which you can buy the base currency (i.e. sell the second currency).
The first currency listed is the base currency. In the major currency pairs the US dollar is traditionally treated as the base currency
this includes USD/JPY, USD/CHF and USD/CAD. In this case $1 USD (the base currency) is quoted in terms of the second currency. For example,
a quote of USD/JPY = 112.25 means that one U.S. dollar is equal to 112.25 Japanese yen.
Amongst the major currency pairs there are three exceptions where the US dollar is not quoted as the base currency, the Euro (EUR),
the British pound (GBP), and the Australian dollar (AUD). In these cases, you might see a quote such as GBP/USD = 1.8455, which means
that one British pound equals 1.8455 U.S. dollars.
In both of the above examples the base currency becomes stronger when its
price increases. For example if the USD/JPY rises from 112.20 to 113.20 the dollar is stronger because it is now worth more JPY.
Cross currencies are currency pairs that do not involve the U.S. dollar, for example, EUR/GBP, GBP/AUD, EUR/JPY etc. A quote of
EUR/GBP at 0.6750 signifies that one Euro is equal to 0.6750 British pounds.
Example of a Forex trade:
The EUR/USD is trading at 1.2250/53 and a trader believes the EUR/USD could rise further.
A trader buys 1 million EUR at 1.2253. This means he has, in effect, paid USD$1,225,300 for 1,000,000 EUR. To enter into such a
transaction a margin of 3% or €30,000 would be required.
Every time the market moves by .0001 the trader makes or loses USD$100.
For example if the trader is correct and the EUR/USD moves to 1.2383/86 then he could then sell EUR (buy USD) at 1.2383 or USD$1,238,300.
This would generate a profit of USD$13,000. If the position were to move against you then you would incur a loss which could be in excess
of the funds deposit.
Summary
Buy 1m EUR at 1.2253 USD$1,225,300
Sell 1m EUR at 1.2383 USD$1,238,300
PROFIT USD$ 13,000
Forex Value Dates
All forex quotes are typically based on settlement 2 business days
after the transaction was executed (the one major exception being the USD/Canadian dollar which settles after one business day).
Theoretically a currency trader will take physical delivery of the currency in two days, however, delivery is avoided by rolling the positions
forward one day, usually referred to as Tomorrow Next Day (Tom Next) procedures. The newly opened position is assigned a new value date allowing
the client to hold this position another day without taking delivery of the currency.
The Tom Next rate is determined by the respective difference in interest rates between the two currencies held. If a trader is long a
high interest currency and short a low interest currency he will earn interest for one day. If a trader is holding the foreign currency with
the lower rate of interest he will pay interest. These payments are received during the establishment of the new opening rate, in the form of
a slightly better or worse price after the roll (swap) has taken place.
During the roll procedure all open positions are closed at
the current market rate, and any unrealised profits or losses are realised. This new rate is determined by the price the position was closed
out at plus or minus the Tom Next rate.
It a trader is flat e.g. long €2 million EUR/USD and short €2 million EUR/USD it is not
necessary to roll positions.
Information regarding daily "Tom Next" rates can be obtained from your account executive.