What it means
At the start of the trading day many exchanges run an opening auction, which sets a single price by matching the orders collected before the market opens. A limit on open order, often shortened to LOO, can only be filled in that auction.
The investor chooses a limit price. For a buy order, the limit is the highest price the investor will pay, and for a sell order it is the lowest price the investor will accept.
If the opening price meets the limit, the order is filled at the opening price, which may be better than the limit. If the opening price is worse than the limit, the order is cancelled.
The order is useful for investors who want to trade at the open but are worried about gaps caused by overnight news. It gives certainty about the worst price but no certainty of getting the trade done.
Compared with a market on open order, which fills at whatever price opens, the limit version trades price protection against the chance of no fill. Investors with large orders may also prefer it, because the opening auction often has deep liquidity.
Details vary by exchange, including cut-off times for entering or changing these orders, and brokers may have their own rules. Investors should check the rules of the market they use.
In practice
Real-world examples.
Example
A fund manager wants to buy 20,000 shares of a utility company at the opening auction but not above $32.00. She enters a limit on open order for that amount. The stock opens at $31.90 and the order fills in full.
Example
A retail investor holding shares worried about overnight news enters a limit on open sell order at $18.00. The stock gaps down to open at $16.50, below her limit. The order is cancelled and she decides what to do after seeing the market.
Example
A trader at an asset manager has to rebalance a portfolio at the open. He splits the work, using limit on open orders for liquid shares and ordinary orders for less liquid ones. This keeps control of price on the shares with the biggest swings.
Formula
Calculation
Buy order fills if: Opening price is less than or equal to the limit price
Sell order fills if: Opening price is greater than or equal to the limit price
Suppose an investor enters a limit on open order to buy 1,000 shares with a limit of $50.00. If the stock opens at $49.80, the order fills at $49.80, so the cost is 1,000 x 49.80 = $49,800, which is $200 less than the $50,000 the limit would allow. If the stock opens at $50.40, the opening price is above the limit, so the order is cancelled and no shares are bought. The orders protect the investor from paying more than planned, but they give up the chance to trade if the open is unfavourable. For a sell order, the fill test reverses, so a limit of $18.00 fills only if the open is $18.00 or higher.Case study
Seen in the real world.
Calloway Wealth is an illustrative, fictional advisory firm that wants to buy 5,000 shares of a technology company at the open after a good earnings report. The client is willing to pay up to $120.00 but not more. The firm places a limit on open buy order at $120.00.
The shares open at $124.00 after a surge, above the limit, so the order is cancelled and the client avoids paying 5,000 x 4 = $20,000 more than planned. Later in the day the price falls back to $119, and the client buys with a normal limit order. The numbers are invented.
The adviser explained that the order had done its job, which was to cap the price rather than to guarantee a fill. The client later decided to buy half the position in the afternoon and keep the rest in reserve in case the price eased further.
Watch out
Common mistakes.
- Assuming the order stays alive after the open. If it does not fill at the opening auction, it is cancelled.
- Believing the order always fills at the limit. It fills at the opening price, which can be better than the limit.
- Entering the order after the cut-off time. Exchanges close order entry for the auction at a set time.
Questions
People also ask.
What is the difference between a limit on open and a market on open order?
A market on open fills at any opening price, while a limit on open fills only at your limit or better.
Can I cancel it?
Usually yes, until the cut-off time set by the exchange or broker.
Who uses these orders?
Fund managers, traders and retail investors who want to deal at the opening auction with price protection.
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