Close orders seek to execute transactions at or near the closing price, while open orders require a transaction at or near the open price. Brokers delay filing closing orders until the last few minutes of trading and can fill orders from various sources. Brokers must transact in a manner that produces the best possible result for the client, and investors can limit their chance of unfavorable prices with sell limit orders at close.
A close order refers to a transaction that the investor stipulates will occur as close as possible to the end of the trading day, seeking to execute the order at or near the closing price. Brokers delay filing closing orders, also known as market closing orders (MOCs), no matter when they receive them, until the last few minutes of trading. Brokers can fill orders directly from the floor of a national or regional stock exchange, from the brokerage’s internal inventory, or from an external market maker. Alternatively, they can use the Electronic Communications Network (ECN), which routinely matches the corresponding buy and sell orders. Floor orders must be manually passed to the floor agent before execution is possible, making time critical for a floor order to close.
The counterparty to a close order is the open order, which requires a transaction at the beginning of the trading day at or near the open price. Another name for the opening order is open rotation. The time and method of execution of the order may affect the overall success of the order. Limit orders, which place fixed price restrictions on buying or selling, may not be filled if they are placed too late in the trading day. For market orders, which are executed regardless of price, speed and precise timing are vital.
Some brokers receive incentives from market makers to route orders through them. Inside orders filled from brokerage inventory generate profit from the spread. No matter how an order is filled, the broker is obligated to transact in a manner that produces the best possible result for the client. The Securities and Exchange Commission (SEC) requires in the SEC Disclosure Rule that brokers disclose the details of each market order and inform investors of the suboptimal execution service. Brokers with poor running records must pay heavy fines and penalties.
Investors who sell securities try to capitalize on the accelerated volume near the end of a trading day by placing orders at the close. If an investor wants to limit his chance of an unfavorable price, he can place a sell limit order at close, which places a floor on the sell price. For example, a trader who wishes to sell 100 shares of XYZ at a sum of $50.00 US dollars per share or more would place a closing sell limit at $50 USD. If the prices fell to $48 USD per share, the broker would not fill the order. However, if the price were to increase to $51 USD per share, the order would be filled.
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