Scale Orders

Definition

The term scale order refers to a series of limit orders of progressively increasing or decreasing prices.  Scale orders are used by traders to ensure large transactions are not subject to deteriorating prices.

Explanation

Traders can use scale orders as an alternative to placing large block orders, the latter of which is subject to deteriorating prices as the market reacts to the volume of the transaction.  Scale orders allow traders to split a larger transaction into smaller volumes, which limits market volatility and protects profits.  Generally, these orders fall into two broad categories:

  • Buy Scale Orders:  a series of limit orders with decreasing prices.  Each order in the series is triggered as the price of the security declines.
  • Sell Scale Orders:  a series of limit orders with increasing prices.  Each order in the series is triggered as the price of the security increases.

Example

A trader would like to sell 10,000 shares of Company XYZ, but she is afraid that a relatively large block trade would result in a sharp drop in the price of the company's stock.  The current market price of the stock is $20.25 per share.  Instead of placing one large order, the trader places a Good-Til-Canceled sell scale order, with the following instructions:

Total Order Size = 10,000 shares
Scale Order Size = 1,000 shares
Scale Price Increment = $0.01
Starting Price = $20.25
NBBO = $20.23 - $20.27

If the price of Company XYZ's stock falls to $20.25, 1,000 shares will be sold.  The stock's price must then drop to $20.24 before the next 1,000 shares are sold.  This continues until the order is cancelled or the price of the stock drops to $20.15, at which point all of the orders would have been executed.

Related Terms

round lot orders, Order Protection Rule, odd lot orders, buy minus orders, sell plus orders