Market order with protection

A market order says fill me now, at whatever the best prices are. That is its strength and its danger. If the book is thin, a large market order keeps climbing through the sell side, and each extra lot is filled at a worse price.

The workbook describes two variations of the market order. A market order without protection trades at the best available price or prices in the market at that moment, however far that goes. A market order with protection is a combination of market and limit order. It allows the market order to be executed up to a specified level mentioned by the trader. The risk of an order getting executed at any price is protected by using such order.

So the trader keeps the urgency of a market order but draws a line beyond which it will not chase the price.

The same facility appears again in Chapter 6's list of pre-trade checks, under the name market price protection, alongside the self-trade check, the kill switch and cancel on logout.

Three ways to buy (Chapter 6, section 6.3.2):

Where it sits in the risk checks (section 6.4.2):

Pre-order checks apply before an order enters the trading system; pre-trade checks apply before a trade is executed. Market price protection belongs to the second group because it stops an order that is already in the market from trading beyond the protected level.

The workbook does not specify what happens to any unexecuted balance, or how the protection level is set on a particular exchange; those are exchange operating details.

The order book is the workbook's (Chapter 6, market order illustration); the order size and protection level are illustrative.

A client wants to buy 300 lots of USDINR futures (USD 1,000 each).

Market order without protection. It takes 100 at 82.60, 119 at 82.65 and 81 at 82.70:

100 × 1,000 × 82.60 = Rs  82,60,000
119 × 1,000 × 82.65 = Rs  98,35,350
 81 × 1,000 × 82.70 = Rs  66,98,700
              Total = Rs 2,47,94,050

Market order with protection up to 82.65. It trades exactly as fast, but stops at the protected level:

100 × 1,000 × 82.60 = Rs  82,60,000
119 × 1,000 × 82.65 = Rs  98,35,350
              Total = Rs 1,80,95,350 for 219 lots

The remaining 81 lots do not execute at 82.70. Had they done so, those 81 lots would have cost (82.70 − 82.65) × 81 × 1,000 = Rs 4,050 more than at the protected level. In a thin book, or with a larger order, the protection saves far more.

Chapter 6 (Trading Mechanism in Exchange Traded Currency Derivatives) defines the market order with protection in section 6.3.2 (Types of orders, price condition) and lists market price protection among the pre-trade checks in section 6.4.2. Expect a question asking which order type combines market and limit features, and one asking whether market price protection is a pre-order or a pre-trade check.

• It is a combination of market and limit order — the workbook's exact description.
• It limits the price, not the speed. The order still executes immediately at the best prices up to the protected level.
• Market price protection is a pre-trade check, not a pre-order check.
• Do not confuse it with a stop-loss order. A stop-loss order waits for a trigger price before entering the market; a market order with protection enters at once.
• Do not confuse it with IOC. IOC is a time condition that cancels the unmatched balance; protection is a price condition.
• A market order without protection executes at the best available price or prices, however far through the book it has to go.