What is IOC in Share Market?

Introduction

IOC is Immediate or Cancel order. Investors typically use IOC orders to place large orders so that they do not need to fill orders at multiple prices. The part of the order which is not filled is canceled out immediately. It allows investors to swiftly buy or sell and thus help them to manage executions efficiently. It is a ‘zero duration’ order and only a few seconds remain between the placement and execution of an order. Let’s deep dive and understand more about Immediate or cancel orders in this article.

Topics Covered

• Understanding the IOC?
• Types of IOC Orders
• Benefits of IOC in Share Market
• What are Risks involve
• How to Place an Immediate or Cancel order
• What are the Strategy
• Best Practices for Using This Orders
• What are the Implementation & Regulation of IOC
• Conclusion

Understanding the IOC?

An Immediate or Cancel is a type of order that is executed immediately, either in part or in full. It differs from a market order, which is immediately executed at the prevailing market price, and a limit order, which is executed at a specific price limit. IOC order provides investors with more flexibility. It allows them to execute their trades swiftly without the need to wait for specific price conditions. For example: If you place an order for 1000 shares for ABC Ltd, but the requested quantity of shares is not available, the remaining order will cancel out automatically within a few seconds. If you have placed a limit order, the order is executed at a particular price point and in the case of Immediate or cancel market order it will be executed at the current price point.

Types of IOC Orders

There are several types of orders that investors can execute according to preferred timing & trading instructions. Some of the popular ones are:

• Immediate or Cancel (IOC):

  This order aims to execute as much of the order as possible immediately and cancels the rest.

• Fill or Kill (FOK):

  This order is executed entirely, or it is canceled out. Partial order is not allowed.

• All or Nothing (AON):

  This order specifies that the entire order must be executed in full or not at all. However, it is different from FOK orders, as pending AON orders remain active until executed or canceled.

• One Cancels Other (OCO):

  This order involves placing multiple orders simultaneously, where the execution of one order cancels the remaining orders.

Recommended Read: Price-to-Book Ratio

Benefits of IOC in Share Market

• Reduced market impact:

  When market conditions are good, there are more buyers and sellers, and spreads are narrow. However, spreads widen when market activity is low.

• Better execution price:

  When assets can be easily bought and sold due to high liquidity, spreads are narrow. On the other hand, spreads widen when liquidity is low.

• Minimized risk:

  When market fluctuations increase, spreads widen. On the other hand, spreads are narrow when market volatility is low.

• Increased control over trades:

  Investors have more control over the execution of their trades, ensuring timely and precise transactions.

• Flexibility & increased control over trades:

  :It provides investors with greater flexibility & control. They can set specific criteria, such as desired price or quantity. The option of partial execution allows capturing of available liquidity

• Suitable for active traders:

  These are well-suitable to active traders who frequently enter and exit positions. The immediate execution allows them to take advantage of short-term market opportunities and capitalize on favorable price movements

Recommended Read: Right Issue

What are Risks involved

• Order rejection risk:

  These orders may be rejected if there isn’t sufficient liquidity or if the price moves unfavorably

• Limitations on order execution:

  In certain market conditions, it may be challenging to execute due to limited liquidity.

• Limited market liquidity:

  It can face difficulties in illiquid markets, where there may be a lack of active buyers or sellers for a particular security.

• Hidden costs and fees:

  There may be additional fees or costs associated with the use of this orders

• Market impact risk:

  While Immediate or Canceled orders aim to minimize market impact, large orders can potentially cause price fluctuations as market participants react to the order, impacting the execution price and overall trading outcome.

How to Place an Immediate or Cancel order

The precise process for placing an Immediate or Cancel order may vary depending on your trading platform. Familiarize yourself with the specific procedures with the help of your broker. Broadly, you need to follow the steps, as below:

1. Choose the stock or security you wish to trade in.
2. Determine the quantity of shares or units you want to buy or sell and set the desired price at which you want the trade to be executed.
3. Indicate that you want to place an Immediate or cancel order. This can usually be done by selecting the IOC option on your trading platform or communicating your order type to your broker..
4. Enter the details of your trade, including the stock, quantity, price, and order type, into your trading platform or inform your broker about these details. Review the information before submission.
5. After submitting the order, closely monitor the execution process. Keep an eye on the market conditions as well as any changes in the price. Adjust or cancel the order if required, based on the market fluctuations & your trading strategy.

What are the Strategy

An effective strategy can maximize profits and adapt to various market conditions. By swiftly executing trades, investors can seize price opportunities and secure favorable prices. IOC orders are advantageous in both volatile and liquid markets, mitigating the risk of price fluctuations and enabling quick execution. Successful strategies involve day trading to capitalize on short-term price movements and swing trading based on technical indicators or breakout patterns. It’s crucial to assess market conditions, set appropriate parameters, and closely monitor execution. By doing so, investors can harness the potential of Immediate or cancel orders and optimize their trading outcomes.

Algorithmic trading strategies involve high-frequency trading, statistical arbitrage, and market-making algorithms. These strategies leverage the speed and efficiency of this orders to generate profits in various market conditions. IOC trades facilitate rapid and automated execution of trades based on predefined algorithms. The advantages of IOC orders include minimizing market impact, achieving precise execution, and enabling quick response to market conditions. However, they also come with disadvantages such as limited liquidity and potential order rejections.

Best Practices for Using This Orders

By adhering to following guidelines, investors can harness the benefits of IOC orders while minimizing risks and maximizing trading efficiency.

• Set realistic price and quantity parameters, monitor market conditions closely, and be prepared to adjust or cancel orders if necessary.
• Avoid placing large IOC orders in illiquid stocks.
• Assess market liquidity, volatility, and individual risk tolerance.
• Evaluate the trade-off between immediate execution and potential price slippage.

Recommended Read: Introduction to derivatives trading strategies tips

What are the Implementation & Regulation of IOC

Implementation

It’s important to note that the execution of Immediate or cancel orders is subject to market conditions and liquidity availability, which can impact their implementation. Herein, your broker plays a crucial role in executing these orders. They utilize trading systems and protocols to ensure timely execution of these orders. Brokers are responsible for receiving and transmitting the orders to the market, matching them with appropriate buyers or sellers.

Regulations

All trading activities including Immediate or cancel orders are subject to regulations by SEBI, NSE & BSE. These regulations typically outline rules and compliance requirements for using IOC orders. Investors must adhere to these regulations, which are designed to ensure fair and orderly trading. Primary compliance requirements include documentation, reporting, and following specific protocols when placing orders of IOC. Your broker acts as a mediator for communicating the set prerequisites.

Conclusion

In conclusion, IOC orders provide investors with a valuable tool for executing trades swiftly and efficiently. They offer advantages such as immediate execution, reduced market impact, and increased control over trades. However, there are risks to consider, including order rejection and limitations based on market conditions. By understanding the differences between market, and limit orders, investors can make informed decisions based on their trading objectives and market circumstances. It’s crucial to stay compliant with Immediate or cancel order regulations and continuously evaluate the benefits and risks associated with their usage.