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When you initiate a ‘Buy’ or ‘Sell’ order from your trading account, the process looks simple because you only click a button. But a lot happens behind the scenes. Your broker receives the order and attempts to fulfill it. When they can’t execute it in full in one go, they do so in parts until it’s complete.
But this approach can be problematic. Imagine you’re trying to buy 10,000 shares of a stock to execute a specific strategy. The broker fills 6,000 shares, and then the price jumps. Now you’re stuck with a partial position that doesn’t match your plan, and completing it will cost more. Worse, you might have revealed your intentions to the market. That is exactly the problem that Fill or Kill (FOK) orders solve. This article explains how they work, when to use them, and what makes them handy in fast-moving markets.
Source: Abbreviations.com
What is a “Fill or Kill” Order?
When you initiate a ‘Buy’ or ‘Sell’ order from your trading account, the process looks simple because you only click a button. But a lot happens behind the scenes. Your broker receives the order and attempts to fulfill it. When they can’t execute it in full in one go, they do so in parts until it’s complete.
But this approach can be problematic. Imagine you’re trying to buy 10,000 shares of a stock to execute a specific strategy. The broker fills 6,000 shares, and then the price jumps. Now you’re stuck with a partial position that doesn’t match your plan, and completing it will cost more. Worse, you might have revealed your intentions to the market. That is exactly the problem that Fill or Kill (FOK) orders solve. This article explains how they work, when to use them, and what makes them handy in fast-moving markets.
How Does This Order Type Work?
When you initiate a transaction, your broker has one job: to match your order with a corresponding offer or bid. That is to say, if you want to buy a certain number of shares at a specific price, the broker will match you with a seller at that price.
What happens is this: the broker sends your order to the market. The exchange system searches for opposite orders at that price, and if matched, your order is filled. But if only part of your requested quantity is available at your price, just that part gets filled. The rest stays open, waiting for someone to match the remainder – or the order expires.
So, if you place a standard order, say a simple Limit Order, you’re simply telling your broker to get you the best price possible. Suppose you want 10,000 shares of a company trading at $50. The first thing the broker does is transmit your order to the market (the stock exchange). The exchange’s computer system then looks for sellers willing to sell at $50 or lower.
Let’s say that the computer immediately finds one seller offering 2,000 shares at $49.99. This is even better. The system executes a trade, and you now own 2,000 of the 10,000 shares you wanted, and your average cost so far is $49.99.
A few seconds later, the computer system finds another seller with 3,000 shares at exactly $50.00. The system executes this trade. You now own a total of 5,000 shares, and the average cost is now the average of the two prices.
But there are still 5,000 shares waiting for offers. This bit of the order will remain active in the market, and other traders can see that a buyer (you) is waiting to buy 5,000 shares at $50.00. And a minute later, a third seller comes along and sells you 1,500 shares at $50.00. You now have 6,500 shares. Finally, after another two minutes, a fourth seller fills the last 3,500 shares at $50.00. Your order is now 100% complete.
So, in this normal order, you got all the 10,000 shares you wanted. But this took several minutes and four partial fills. And you ended up with a blended average price based on all those small trades.
Now, let’s assume that you placed a FOK order instead of the normal one. Just like before, you direct your broker to purchase 10,000 shares of the company trading at $50.00 or less.
The same procedure the broker followed with the normal order will be followed here. However, the system does not look for just one seller; it looks to see if all 10,000 shares are available right now from any combination of sellers at $50.00 or less.
Suppose the system sees the same sellers as before: one with 2,000 shares at $49.99, one with 3,000 at $50.00, and one with 1,500 at $50.00. That’s only 6,500 shares available immediately. And because it cannot fulfill the entire 10,000-share order in one instant, it does not execute any of the trade. It immediately cancels your entire order.
So, the outcome is that you buy zero shares, and the process is over in a fraction of a second. And most importantly, your trading strategy remains intact – you weren’t left with a partial position of 6,500 shares, which you may not have wanted.
Why Would You Want to Use a FOK Order?
If the example we’ve just seen tells us anything, it is that traders use FOK orders when they want guaranteed and complete results. They do not want in-between outcomes for their trades. Such priorities are common with traders in the following situations:
1. Trading Large Blocks of Stock
The goal here is to buy or sell a very large number of shares at one specific price. This is important because the trader’s strategy depends on acquiring or dumping the entire block at a known cost. If they only got a partial fill, they would be left with an unplanned and potentially risky partial position. The FOK guarantees they either get the whole position they want or no position at all.
2. Snapping Up a Perceived Bargain
A trader in this situation wants to instantly buy a stock that appears to be temporarily selling at a low price. This is because they believe that the low price is a fleeting opportunity. They want to buy all the available shares at that great price immediately. If they can’t get the full amount, they don’t want to bother with a small portion, as the price might already be moving back up by the time the rest of the order fills.
3. Avoiding Price Slippage on Large Orders
Here, the trader wants to prevent the market from moving against them during a large trade. When other traders see a large order being filled piece by piece, it can signal that a big player is active. This can cause the price to rise (if buying) or fall (if selling) before the order is complete. A FOK order executes all at once, hiding the full size of the intention and minimizing this “price slippage.”
4. Trading in Thin or Illiquid Markets
The goal in this situation is to see if a large trade is even possible in a stock that doesn’t trade often. In these markets, there are few buyers and sellers. A trader might use a FOK order to test the waters. They are essentially asking the market, “Can anyone handle my entire order right now?” If not, the order is killed, and they avoid getting stuck with a small, hard-to-sell portion of shares.
What happens is this: the broker sends your order to the market. The exchange system searches for opposite orders at that price, and if matched, your order is filled. But if only part of your requested quantity is available at your price, just that part gets filled. The rest stays open, waiting for someone to match the remainder – or the order expires.
So, if you place a standard order, say a simple Limit Order, you’re simply telling your broker to get you the best price possible. Suppose you want 10,000 shares of a company trading at $50. The first thing the broker does is transmit your order to the market (the stock exchange). The exchange’s computer system then looks for sellers willing to sell at $50 or lower.
Let’s say that the computer immediately finds one seller offering 2,000 shares at $49.99. This is even better. The system executes a trade, and you now own 2,000 of the 10,000 shares you wanted, and your average cost so far is $49.99.
A few seconds later, the computer system finds another seller with 3,000 shares at exactly $50.00. The system executes this trade. You now own a total of 5,000 shares, and the average cost is now the average of the two prices.
But there are still 5,000 shares waiting for offers. This bit of the order will remain active in the market, and other traders can see that a buyer (you) is waiting to buy 5,000 shares at $50.00. And a minute later, a third seller comes along and sells you 1,500 shares at $50.00. You now have 6,500 shares. Finally, after another two minutes, a fourth seller fills the last 3,500 shares at $50.00. Your order is now 100% complete.
So, in this normal order, you got all the 10,000 shares you wanted. But this took several minutes and four partial fills. And you ended up with a blended average price based on all those small trades.
Now, let’s assume that you placed a FOK order instead of the normal one. Just like before, you direct your broker to purchase 10,000 shares of the company trading at $50.00 or less.
The same procedure the broker followed with the normal order will be followed here. However, the system does not look for just one seller; it looks to see if all 10,000 shares are available right now from any combination of sellers at $50.00 or less.
Suppose the system sees the same sellers as before: one with 2,000 shares at $49.99, one with 3,000 at $50.00, and one with 1,500 at $50.00. That’s only 6,500 shares available immediately. And because it cannot fulfill the entire 10,000-share order in one instant, it does not execute any of the trade. It immediately cancels your entire order.
So, the outcome is that you buy zero shares, and the process is over in a fraction of a second. And most importantly, your trading strategy remains intact – you weren’t left with a partial position of 6,500 shares, which you may not have wanted.
