Benefits of Immediate or Cancel Order (IOC)
The stock market is a fast-paced environment with thousands of participants trading at any time of the day. If you are an investor or a trader, it can get tough to track stock prices and transact in multiple securities throughout the day. To counter this, you can place an IOC order on the exchange — Immediate Order or Cancel Order. This article takes a detailed look into the advantages of IOC.
What is an Immediate or Cancel Order?
An Immediate or Cancel order (IOC) is one of many forms of ‘orders’ one can place. This order specifies that it should be executed as soon as it is put on the market. The underlying implication is that you buy or sell security almost immediately, otherwise the order will be cancelled and will not be a pending order. The order is cancelled immediately, without the investor’s intervention.
An IOC a ‘duration’ or ‘period’ order — investors can choose how long the order will be available. The IOC on the stock market is a ‘zero period’ order because it merely takes a few seconds from order to execution.
IOC orders on the stock exchange can be set up as either ‘limit’ or ‘market’ orders. IOC limit orders state that you can only buy or sell securities when a certain price is reached. However, in a market order, the transaction runs at the best current price points.
Investors typically use IOC when placing large orders to avoid different prices. IOC orders will automatically and immediately cancel the portion of the order that is not fulfilled. For example, suppose a client orders an IOC to buy 5,000 shares of International Business Machines Corporation (IBM). The portion of the 5,000 shares that were not purchased immediately, will be automatically cancelled. Those who trade multiple stocks throughout the day can use IOC orders to minimize the risk of manual error.
How is an IOC different from a day order?
The difference between an IOC order and a day order is rather straightforward. A day order, if not fulfilled, gets cancelled at the end of the trading day, whereas, an IOC in the share market ends when the security’s unavailability is discovered.
Example of an IOC
Assuming an investor places an IOC market order to buy 1,000 shares of ABC Inc. Your order book shows that 2,000 shares are offered for $170.95 and 500 shares are offered for $171.00. The order will immediately fill 500 shares at the offer price ($171) and cancel the unfilled portion of the 500 shares.
Suppose another investor places an IOC limit order to buy 1,000 shares of ABC Inc. for $169 at the start of the day, when the stock price is currently $170. The index falls slightly in the afternoon, at which point sellers are offering 700 shares of ABC Inc. for $169. However, the IOC order was not executed because it was cancelled shortly after it failed to execute early in the day.
IOC limit orders prevent inadequate execution in fast-moving or illiquid markets. On the other hand, IOC market orders guarantee full or partial execution of trending stocks that possess a strong buyer demand.
Benefits of Immediate or Cancel Order (IOC)
Understanding the advantages of the IOC order requires some basic understanding of the stock market. Opening a free trading account with a brokerage firm like IIFL is a great way to get started in the industry, but without a solid foundation in understanding, it's difficult to make money. With the advent of online trading accounts, which are very easy and convenient to open and use, entry barriers are lowered.
If you open an online trading account and place an order to buy or sell, there is no guarantee that the order will be fulfilled. There may be discrepancies between the number of people trying to buy or sell stock. If you place an order to buy but there aren't enough sellers, you would have to wait for order completion. Wait times can create a large number of active positions, which can be puzzling and difficult to monitor.
As discussed, IOC may be configured as a limit or market orders. In a market order, shares are transacted at current market rates. You may also use a limit order to determine the price that you want to buy or sell at.
With IOCs, there is likewise a provision for partial fulfilment of orders. Assume you positioned an IOC order to buy 100 shares of PQR Ltd. Presently, the stock is inadequate to sell. However, as an IOC order is initiated quickly, you may be allotted part of 100, say 20 shares, while the order for the remaining 80 gets automatically cancelled. This way traders and investors can gain greater flexibility in the stock market.
Final word
When used correctly, Immediate or Cancel (IOC) orders can be very efficient tools. Multiple IOC commands can be executed over time without manually tracking transaction status. However, many partially completed IOC orders can create confusion and make calculations susceptible to errors. To start trading with IOC orders, all you have to do is open a trading and Demat account. You may make multiple investments through a single platform with the Demat and trading account.