I’ve established a fidelity brokerage account and I’ve been buying some ETFs. I can place an order to execute if/when a stock price hits a certain point. Essentially, I’m saying “if this stock hits $50, then buy 100 shares” or whatever. Okay, that makes sense, it’s just an automatic order executing system.
But when I make that order, it holds the money in my account and that money is no longer available for trading, that $5000 is just sitting waiting for the price to be right for the execute order to go through.
Is that how buy orders usually work with brokerages? Is it a legal requirement? Do other brokers do it differently? Is there another type of buy order which does not hold the money in reserve like that?
The reason I ask is that it seems to me that I should be able to put in buy orders without having any money reserved for them. A buy order is essentially “I’m willing to buy X shares if it gets down to Y price”, I should be able to make that declaration for as many stocks as I want. I should be able to say “I will buy this stock if it hits this price, or this one if it hits this price”, and then whichever stocks hit that price first, I should be able to buy them up until my money runs out. Then, later, if a buy order hits its target price but I’m out of money in the account, then it just won’t trigger. That makes sense to me.
The way it is, if it takes a long time for that stock to hit my price, or it never hits it, I just have money in limbo locked and doing nothing, and I’m limited to the number of potential buy orders I can put out there because I need the money in the account to potentially buy all of them at once, since it’s reserved.
This is probably a very basic question, but I’m new to all of this.
You will see that is the normal practice. Basically, you have told them you want to buy this many at this price. They can’t change your order, so the only way they can guarantee you have the funds when needed is to not let you use that money for other things. Basically, that order could be fulfilled at any time, so they need to have those funds available to them. You can cancel the order before it is filled, but until then, you lose access to those funds.
I believe the reason for that is that they (sometimes) will fill that order on some kind of external exchange and when it’s filled, there’s no “check that @SenorBeef still has enough money” step in that process. The order was placed, someone accepted, it’s done. No takebacks.
So if you have a bunch of limit orders and there’s a big crash, then there’s a race between your brokerage noticing that you’re out of money and all those outstanding orders getting filled. And if they all get filled and you don’t have the money, then the brokerage holds the risk. That is a risk they are not willing to assume for mere retail traders.
If you are a big deal, you may be able to get more flexible order logic.
Is there some way to do what I want? I mean, besides sitting watching stock tickers all day.
Like, if stock A B and C were all at $105, and I was willing to buy any of them at $100, and I had $1000 to spend, so my goal was to buy whatever stock his $100 first, and then $1000 buying 10 shares (at which point I would no longer be interested in buying the others because I already spent my money)… is there some way I could do that?
It seems trivial to implement something like that, but I don’t know what it would be called or how I would use it.
There isn’t a way to do what you want at any brokerage I’m aware of and I do work in the industry.
Some firms used to allow accounts to stack buy orders and used various risk management algorithms to determine how high the stack could get. You definitely do not want to be in the situation where you simply aren’t able to pay for a trade and the stock has to be sold without ever being fully paid for.
If interest rates continue to rise, your brokerage firm may have places for you to hold that cash to pay for trades and continue to earn interest on it.
In a self directed account, the money has to be there to execute the order that you made.
If you have a managed account, you can give your broker, who will sit there all day and watch and instruct him to sell certain securities and invest in your buy order.
Or you could just create an alert to notify you when the stock reaches a certain price and then you can go execute the buy on your own.
Suppose that they have to undo a transaction ? Then your buy order goes through spending the cash you had thought was invested elsewhere. Ok its rare they undo executed transactions.
But if you can place orders that can’t be fullfilled, they would have many orders on their system that can’t be fullfilled. You could put in orders for all the different stocks and securities .so then you have 5000 orders in but only one of them might be fullfilled.
And imagine that your 5000 orders are treated as serious, and they allocate 5000 workers to go to the stock exchange or wherever, and buy your stuff. They see the order has the note “No funds available, but the buyer will make the funds available by the time of the trade”… So they all ring in and check the funds are there ? They need 5000 receptionists to take the calls. What if two of the agents are told that the funds are there ? They both go to buy, and then they have spent twice as much as you requested. Thats a race condition…
And even if there are no race conditions, what if there is a mistake in deciding which trade to implement ? You have told them the priority is is to buy stock X over stock Y, but they mix it up and buy stock Y even though they could buy stock X.
Having the funds reserved means that its a sure thing , no priorities to assess, no race conditions in communications to avoid…and no overload of the orders tray with buy orders that at present lack funds.
(or sell orders that lack stock.)
I mean that’s not actually how it works now, is it? It’s all computerized. I don’t know how orders are actually processed, so I concede that this might cause problems with my idea.
But I can get a live ticker of stock prices, and just, when the price hit my target, manually send in a buy order and buy up the stock. Of course that would require me to sit watching the ticker all day, and I would prefer to automate that. I just assumed that a stock broker would have this functionality. Now - maybe because my order isn’t pre-registered with them, but only gets put in after the stock hits that price - if there’s a delay I might miss that price. But I’d be okay with that.
So, basically, I just want to be able to watch the prices all day and issue a buy order when it hits a certain price, just automatically. I’m sure there are programs or sites that day traders use to do this, but that’s beyond the scope of what I’m willing to do, so I guess I’ll just accept that this is how it works. It just seemed obvious to me that an automatic buy order being created when a stock hits a certain price would be a trivial and obvious feature to have.
Yes, this is a standard thing called a one-cancels-other order. TD Ameritrade has it. I would think Fidelity does too. It’s possible you would need to do some kind of account upgrade and/or use their desktop platform (i think Fidelity’s is called Active Trader Pro) rather than the web interface.
I am not a stock trader but this seems legit to me.
The OP is the one buying the stocks so his money should be used to pay for them. In a situation like this where the purchase of the stocks will occur at some unspecified date, the money needs to be waiting.
The alternative is that the brokerage company buys the stocks with its own money and then turns around and bills you. There are problems with that.
First, some people are going to refuse to pay up. The brokerage company would then either be stuck holding the stocks it didn’t want or have to initiate some kind of collection action against the person refusing to pay.
Second, using this system only moves the problem on to the brokerage company. The OP doesn’t want to have his money taken out of circulation and held awaiting a future purchase. But the brokerage company doesn’t want that happening to their money either. But in order to have the money ready when the time comes, somebody’s money has to be held. And it seems fair that the person who placed the order be the one putting up the money.
This is an avoidable situation. If it bothers you to have your money being put on hold, just don’t place orders like this. Watch the market and when the stock reaches the point where you want to buy it, place the order at that time using money you have on hand. That way you have the use of that money in the period before the purchase.
I don’t see why that’s the case except that maybe the internal processes of stock trading has different requirements than normal agreements to buy stuff.
If I go to a farmer’s market, and say “any time anyone sells an apple for less than $2 I will buy 100, or if anyone sells a pear for less than $1, I will buy 200” - that doesn’t mean that I must have some personal shopper hold $400 in escrow for me in case those things become available. Maybe I show up with $200 the apples hit $2 and I buy $200 worth of apples and I simply won’t be able to make an order for pears anymore because when that opportunity comes up my money is spent.
Now, I’m willing to concede that there’s some sort of disconnect between me and the broker and the actual process of buying stock that’s different from this. That’s fine. But it’s weird to me that people seem to disagree with the idea that you can simply decide to buy various different products at various price points and you’re willing to buy up until you run out of money and somehow this logically doesn’t work. Of course it works.
If the issue is the way that stock orders are processed, then the fix would be easy. I can get a price alert through fidelity’s software - so if stock X hits price Y, it pops up and tells me. Instead of popping up and telling me, it could simply place my order for Z shares of stock right then, as I’ve instructed it. Maybe because it’s not in the “cash in hand, immediately ready to buy” phase, I miss out on that price, but usually that won’t be the case, and it’s just automating what I could do myself manually, which is to wait for stock prices to reach a certain price and then put in an order.
TDAmeritrade (and probably some other brokers) have an API that looks like it can monitor prices and place trades. So you could write some code to do what you want. Or hire someone to do so. But then you accept the risk of race conditions and algorithmic complexity.
That’s actually pretty much how it works. The broker sends out the order, and the money in your account isn’t attached to the order in some way. The order gets done and then the money gets officially transferred in the next few days. The way that the brokerage ensures that it’s your money that will get transferred and not their money is by not accepting multiple orders that could conflict at the same time.
Sure, orders are computerized, but they are still distributed among many computers, and computers are very fast, but not instantaneous. If your two orders are sent to two different computers and both meet their price limit, they will both execute. And then what if you don’t deposit the extra money to cover trades?
The logic that you want does exist, but it is necessarily slower and more complicated, which means that it’s not a pure upgrade over the simplicity of what most brokerages offer to a standard retail client. It’s a tradeoff, and as such it’s generally available to more sophisticated clients who are willing to pay more for the extra utility and also are more likely to understand the explicit tradeoff that’s being made.
It’s due the third party nature of the transaction.
If you go to the farmer’s market with your money in your wallet, you can make instantaneous decisions about what products are worth to you and how much money you are willing to spend on them. So the hundred dollars in your wallet can be spend on apples or pears or pickles or you can spend it on nothing and bring it back home with you.
But suppose you tell me you’re going to the farmer’s market and I say " You know what I love? Blueberry pie. If you see a blueberry pie at the farmer’s market and it’s twenty dollars or less, buy one for me and I’ll pay you for it." And you promise to do this.
At this point, you’ve made a commitment; if you see a blueberry pie at the farmer’s market for twenty dollars, you have promised you will buy it. And the only way you can keep that commitment is to set twenty of the hundred dollars you have in your wallet aside and only spent the remaining eighty dollars on apples or pears. Or I give you a twenty when we talk; that way you can keep my twenty dollars separate from your hundred dollars and you’ll be free to spend all of your money as you wish. But either way, one of us has to put twenty dollars “on hold” while you are walking around the farmer’s market because twenty dollars has to remain available in case somebody is selling blueberry pie that day.