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The profits, risk, and experience obtained from crypto trading are determined when an order is executed successfully. All order execution types (wrong price, delayed, partial fills, etc.) are equally important to validate the execution of today's leading profitable crypto trading strategies.
There are various ways members use order execution on modern crypto exchanges. With the utilisation of deadline-driven execution types along with advanced execution technology, order execution date, time, and price are consistent and timely and therefore enable execution at the highest speed, accuracy, and integrity.
What Is Order Execution in Crypto Trading?
Order execution refers to the completion of a buy or sell order by a trader at a crypto exchange. When an order is placed, it is immediately evaluated by the matching engine of the exchange, which finds an existing order or pool of liquidity with which the order will be matched at the execution price for quantity and time.
Efficient order execution depends on several factors
- Market liquidity
- Order type selected
- Exchange infrastructure
- Network latency
- Price volatility
Traders working in high-density environments must understand that, in terms of milliseconds, the difference between completing an order and not completing an order can be quite large, especially for institutional traders and high-frequency strategies.
Common Types of Order Execution in Crypto Exchanges
Market Order Execution
Market orders immediately execute at whatever is deemed to be the best price currently on record. The trader only specifies a quantity and not any price, so the exchange will execute the order by taking existing limit orders from the record until all requested units have been filled.
Market orders have two benefits: they guarantee execution, and there is no guarantee that the market has maintained its previous price stability. In cases of high volatility or very little liquidity, slippage occurs when the actual trade price is significantly different from the anticipated one. Although there are no guarantees of pricing when placing a Market order, they are commonly placed due to being easy to use and quick to execute in time-sensitive situations.
Limit Order Execution
Limit orders allow traders to place a limit price on how much they want to pay or receive for any given asset. The Limit order will not execute until the actual market price reaches the pre-determined limit price; therefore, traders have more control over how a trade may execute.
Limit orders may not always fill if the market does not reach the pre-established limit price. However, they are popular amongst traders looking for more precise pricing and strategic positioning. Most exchanges also provide lower fees for Limit orders because they support the maintenance of the order book and thus are usually preferred by longer-term and professional traders.
Stop Order Execution (Stop-Loss / Stop-Buy)
Conditional orders (stop orders) are initiated based on a predetermined price. When triggered, the stop order generally changes to a market order.
Stop-loss orders allow a trader to exit a losing position without needing to make a decision each time a price drop occurs. Stop-buy orders may be used to enter a trade at the point of breakout in the upward movement of an asset. The main benefits of using stop and stop-loss orders are automation and safety. However, both stop and stop-loss orders can be impacted by rapid price changes, leading to poor executions.
Stop-Limit Order Execution
Stop-limit orders include both features of stop orders and limit orders. In this respect, when the stop price has been hit, rather than switching to a market order, the order switches to a limit order. By doing so, a trader has control over the price at which the order is filled.
In volatile markets, this order type can provide a little more protection for traders because they are able to set limits on how far an order can slide in price before becoming ineffective. However, if the market quickly moves past the limit price of an order, then the order would never get filled, leaving the trader with the original position.
Trailing Stop Order Execution
Trailing stop orders allow traders to modify the stop price as the market changes in their favour. Instead of having a specific stop price that remains set regardless of market price changes, the trailing stop price moves (or "trails") the market by a set amount or percentage.
Trailing stop orders protect profits and keep a trader’s open position profitable while they are waiting for additional increases in their trading position with regard to market price.
One-Cancels-the-Other (OCO) Order Execution
OCO orders give the trader the ability to establish two orders simultaneously into a single order, often one order is to sell a security at a certain level (take profit order) and the other order would sell a security at an undesirable level (stop loss order). If the take profit order gets executed, the stop loss order is automatically cancelled.
By being able to place multiple order types into one OCO order, the trader is able to place both their profit target and risk limit into one order without having to watch over it constantly and manage the execution.
Professional traders very often utilize OCO orders to execute their disciplined trading plans using automated systems.
Advanced Order Execution Types in Crypto Trading
Fill or Kill (FOK) Order Execution
Fill or Kill orders require that the trader execute the entire order quantity immediately at the set price within a specified time period of the execution of the order. If the trader is unable to fill the entire order, the order is cancelled entirely.
Fill or Kill orders are often favoured by institutional traders because they provide certainty to the institutional trader and do not allow for partial fills, as executing a partial fill could adversely affect the execution of a strategy or pricing of a product.
Immediate or Cancel (IOC) Order Execution
IOC Orders are similar to FOK orders, but instead of requiring the entire quantity to execute immediately, IOC orders allow for partial fills and will automatically cancel any unfilled quantity. IOC orders are executed as fast as possible rather than for completeness.
Traders who trade in rapidly changing markets will find IOC execution beneficial, as it provides them the ability to quickly identify and access available liquidity without needing to have open orders in their books.
Post-Only Order Execution
When a trader uses a Post Only order, they will always be acting as a liquidity provider (maker) and not as a liquidity recipient (taker). When a Post Only order matches an existing order for immediate execution, the order is automatically cancelled or changed, as it is only permitted to create liquidity.
By using Post Only execution, traders can avoid the Taker fee and will add depth to their Order Book. Due to this, Post Only execution is frequently used by professional traders and market makers who optimize fees.
Time-Weighted Average Price (TWAP) Execution
When utilizing a TWAP (time-weighted average price) execution, traders will take a large order and break it into smaller orders executed across time segments. This allows for a reduction of the overall market impact from the execution, while at the same time allowing for more consistent pricing stability during the entire execution process.
Typically, financial institutions use TWAP strategies to avoid signalling the market of large trades and to allow for a more consistently averaged pricing of trades when executed over time.
Iceberg Order Execution
Traders can utilize Iceberg orders to make visible a small portion of a much larger quantity; therefore, with each executed portion of an Iceberg Order, another portion will be displayed for execution.
The ability to execute Iceberg orders is a method for reducing the likelihood of price manipulation from large order sizes and to eliminate any market reaction(s) created by large quantities of visible orders. This order type is popular with institutional and "whale" traders in both spot and derivative markets.
All-or-None (AON) Order Execution
An AON (All or None) is a type of order in which the entire quantity must be traded in a single transaction; otherwise, the order will not be executed.
AON orders provide a viable method for trading in low liquidity markets. Partial fills in such markets may cause a trader to obtain undesired pricing and inefficiencies in order execution.
Other Specialized Order Execution Types
Good-Till-Cancelled (GTC)
A GTC (Good 'Til Cancelled) order does not expire until the trader cancels it, or until all of its product(s) have been returned. That is to say, a GTC order gives the trader the flexibility to utilize long-term strategy without an expiration date.
GTC orders provide the same flexibility as GTC orders, but GTC orders will also allow for any future trading decisions by the trader based on the circumstances surrounding the GTC orders.
Good-Till-Date (GTD)
A GTD (Good Til Date) order will be filled if it has not endured the period of opportunity, but otherwise, it will expire automatically on a specific day and/or time. This execution type is primarily used to aid traders who have time-sensitive strategies and who need to prevent old orders from becoming outdated.
Volume Weighted Average Price (VWAP)
VWAP (Volume-Weighted Average Price) execution occurs when traders buy and sell an asset in concert with the trends in volume of trading activity.. The purpose of VWAP execution is to achieve pricing that is as close to the average price of trading during the VWAP trading period as possible.
VWAP execution is a common method used among professional traders to execute trades using benchmarks rather than time.
Reduce-only Orders Execution
Reduce-only Orders will only allow the trader to be able to reduce their existing position and will not allow them to create an additional one when created in futures and margin trading environments.
Reduce-only or Close-only Orders allow for better management of risk and to prevent the accidental reversal of two positions when Volatility is High.
How to Choose the Right Order Execution Type?
Depending on the trader's objective, market conditions, tolerance to risk, and size trade will ultimately dictate which type of order execution is used. A trader focused more on speed of execution will typically use a Market or IOC Order, whereas a trader focused on price accuracy may use either a Limit or Stop-Limit Order.
Traders with Larger Size Trades typically use advanced order execution methods such as TWAP, VWAP, and Iceberg Orders to reduce their impact on the market; Risk-Aware Traders will use Stoploss, trailing stop, and OCO Orders; and professional traders routinely utilize Post-Only and Reduce-Only Order Methods to minimise their commission costs and minimise their market exposure.
Fourcrypt’s Approach to High-Performance Order Execution Systems
Fourcrypt delivers cryptocurrency exchange development services with high-performance order execution systems focusing on Low Latency, High Scalability, and Execution Accuracy via the use of advanced Matching Engine technology to facilitate high-volume transactions with minimal delays, even during peaks of activity on the Markets.
Fourcrypt integrates smart order routing, liquidity aggregation and strong risk controls to allow market makers to execute orders across Spot, Margin and Derivatives markets seamlessly. The fourcrypt systems are designed for use by all types of traders, retail and institutional, and as such provide a full range of order types supported by enterprise-class reliability.
Conclusion
Successful execution of an order is the basis of success in the crypto exchange marketplace. An understanding of the types of order execution, from basic market orders to sophisticated automated algorithmic execution systems, provides traders with better results, while also enabling exchanges to deliver better experiences in the highly competitive exchange marketplace.
