What Is a Limit-On-Close Order?

A limit-on-close (LOC) order is a type of order that instructs a broker to buy or sell a security at a specified price or better, but only if the trade can be executed at or near the closing price of the trading day.

When a trader places an LOC order, they specify a limit price at which they want the order to be executed. If the market price is at or better than the specified limit price at the close of the trading day, the order is executed at or near the closing price. If the market price is worse than the specified limit price, the order is not executed.

Pros and Cons of Limit-On-Close Orders

Pros:

1. Price Control: LOC orders allow traders to control the execution price of their trade. By specifying a limit price, traders can ensure that their order is executed only if the closing price is within a specific range, which can help them avoid unfavorable price movements.
2. Reduced Risk: By executing the trade at or near the closing price, traders can reduce the risk of price fluctuations that can occur during the trading day. This can be particularly useful for traders who are sensitive to market volatility.
3. No Intraday Monitoring: LOC orders do not require intraday monitoring, as the order is executed automatically at the close of the trading day. This can be a convenient feature for traders who do not have the time or resources to monitor the markets during the day.

Cons:

1. No Guarantee of Execution: LOC orders are only executed if the closing price is at or better than the specified limit price. If the closing price is worse than the limit price, the order is not executed. This means that there is no guarantee that the order will be executed.
2. No Control Over Execution Time: Since LOC orders are executed at the close of the trading day, traders have no control over the exact time of execution. This can be a disadvantage for traders who want to execute their trades at a specific time.
3. Limited Availability: Not all brokers support LOC orders, and traders should check with their broker before placing this type of order. Additionally, LOC orders may not be suitable for all trading strategies, and traders should carefully consider the advantages and disadvantages before using them.

Limit-On-Close Order Examples

Here are some examples of limit-on-close (LOC) orders:

1. A trader wants to buy 100 shares of XYZ stock, and they want to buy it only if the closing price is at or below $50. They place a LOC order with a limit price of $50. If the closing price of XYZ stock is at or below $50, the order is executed at or near the closing price.
2. A trader wants to sell 200 shares of ABC stock, and they want to sell it only if the closing price is at or above $75. They place a LOC order with a limit price of $75. If the closing price of ABC stock is at or above $75, the order is executed at or near the closing price.
3. A trader wants to sell 50 shares of DEF stock, and they want to sell it only if the closing price is within a specific range of $60 to $65. They place a LOC order with a limit price range of $60 to $65. If the closing price of DEF stock is within the specified range, the order is executed at or near the closing price.

These examples illustrate how traders can use LOC orders to control the execution price of their trades and ensure that they are executed only if the closing price is within a specific range.

Limit-On-Close Order vs. Market-on-Close Order

LOC orders allow traders to specify a limit price at which they want their order to be executed. Traders using LOC orders aim to control the execution price of their trade and execute it only if the closing price is within a specific range.

MOC orders, on the other hand, are executed at the market’s closing price, and traders who use this type of order aim to execute their trades quickly and at the best available price at the close of the market.

LOC orders offer price control and reduced risk but with no guarantee of execution, while MOC orders offer guaranteed execution but with the potential for slippage.

The Bottom Line

In conclusion, limit-on-close orders are a type of order that traders use to buy or sell securities at the closing price. This type of order is beneficial for traders who want to make an investment based on the closing price of a security, and who want more control over the price they pay or receive for the security. However, it is important to note that limit-on-close orders can be risky because they do not guarantee a specific price.