Understanding On Away From The Market

In any trading marketplace, each participant has their price expectations. These prices could be grounded on logic, research, and analysis or simply guesswork to reach the desired price.

All investors may not be willing to trade on the current prices and, therefore, can choose from various available options. This article answers what away-from-the-market means in detail.

Away-from-the-Market

A limit order where the desired price to execute the trade is different from the prevailing market price of the security is called the away-from-the-market. Typically, the limit order to buy in an away-from-the-market offering would be below the current price of the security whereas in the sell limit orders the expected execution price would be higher.

The security’s price must move in the desired direction to execute the away-from-the-market order. A pending order may lead to a wider bid-ask spread for that security.

Order price of an away-from-the-market offering is not immediately available, i.e. it requires the current market price to deviate to execute. The price deviation can be as follows:

1. Buying Security: The limit order to buy a security away from the market means the bid on a limit order is below the current market price.
2. Selling Security: The limit order to sell a security in an away-from-the-market means the ask on the limit order is above the current market price.

Logically, no investor would want to buy a security at a higher price than its current price which means the bid in an away-from-the-market ought to be lower than the prevailing prices. Similarly, an investor selling securities would ask for a higher execution price than the prevailing price in an away-from-the-market order.

Say, STP security is currently trading at INR 100. A limit order to buy 100 shares of the STP security at INR 90 is away-from-the-market order whereas the limit order to sell 100 shares of the security would be at INR 110.

The security price must move towards the order price, to complete an away-from-the-market order

Conditions for the execution of away-from-the-market order

Away-from-the-market orders are typically held for realization if not specified when they should be completed or cancelled. There are other conditions an investor can add to an away-from-the-market order. These conditions include:

1. Fill or Kill (FOK): An away-from-the-market order remains unexecuted unless specified as fill or kill (FOK) orders. A fill or kill order means that the order must be “filled” right away, or “killed.”
2. Good-‘til-Canceled (GTC): An away-from-the-market order remains open perpetually until it is executed or cancelled. It is a default setting for an away-from-the-market order.
3. Immediate or Cancel (IOC): This type of order allows all or only a part of the order to be executed. The portion of the order that remains immediately stands cancelled.
4. All or None (AON): An all or none order requires either the whole order to get executed or nothing at all. There’s no scope for partial fulfilment of an order.

How does Away-from-the-Market work?

Away-from-the-market is a limit order associated with the broker to execute the trade, be it buying or selling of a security. The order should be placed with a pre-specified number of shares with the set limit price.

Advantages of Away-from-the-Market

Away-from-market orders give investors an edge in price control as it allows them to define a price, quantity, and the time it should be executed or cancelled. A limit order like away-from-the-market is a good alternative for investors looking at a target price based on their research and conviction. It is a perfect type of offering for people who want to buy or sell a security as soon as the price hits its expected levels.

Disadvantages of Away-from-the-Market

There are high chances that an away-from-the-market order remains unexecuted, and there remains a possibility it never does. There can be two reasons for a pending order:

1. The security never reaches your desired price level for the order to get executed. An away-from-the-market order does not execute at the current prices and waits for the prices to move either up (in case of selling stocks) or down (in case of buying stocks).
2. The brokerage firms or brokers execute the limit orders on a first-come-first-serve basis. While the price reaches your target point, you may not always get the full allotment of shares. Shares allotment depends on the volume of the trade. You can opt for all or none (AON) if you would like to buy or sell the entire quantity you hold or want to hold.

By default, a limit order remains open until the security achieves the designated limit or the investor requests the broker to cancel the order.

Example of Away-from-the-Market

Suppose you want to buy 100 shares of Aditya Birla Capital Limited (ABCAPITAL) which currently trades at INR 90.60. However, after analyzing its fundamentals and performing technical analysis, you think the best price to enter into a trade in this security is INR 85.

This type of order is known as away-from-the-market order. If your research and analysis prove wrong, and the price of ABCAPITAL never reaches INR 85, your trade remains unexecuted until you cancel it.