Buy Minus Order: Understanding Stock Purchase Limitations Based on Market Ticks

Highlights

• Buy minus orders restrict stock purchases based on the last trade's tick direction.
• Purchases cannot exceed the last sale price if the tick is minus or zero-minus.
• The buy price is further limited based on fractional changes if the tick is plus or zero-plus.

A "buy minus order" is a specific type of limit order used in the stock market, particularly in general equities, to control the price at which a stock can be purchased. This order type is designed to protect investors from overpaying for stocks, especially in volatile or rapidly fluctuating markets. The fundamental concept of a buy minus order revolves around the direction of the "tick" from the most recent trade price—whether it’s positive, negative, or neutral.

What is a Buy Minus Order?

A buy minus order allows an investor to specify the amount of stock they wish to purchase, with the condition that the price at which the stock is acquired must not exceed a certain limit. The critical factor in determining this limit is the direction of the most recent price movement, known as the "tick."

• If the last sale price has a minus or zero-minus tick, the buy price cannot be higher than the last sale price.
• If the last sale price has a plus or zero-plus tick, the buy price cannot exceed the last sale price minus the minimum fractional change allowed for that stock.

This order is typically used when there is concern about the price moving unfavorably, such as when investors want to buy stocks at a price that reflects the recent downward movement or at a price that is no higher than a certain threshold.

How Does the Buy Minus Order Work?

In the context of a buy minus order, the key principle lies in the way the stock’s most recent trade price is classified according to the "tick" system:

1. Minus or Zero-Minor Tick:
• A "minus" tick occurs when the most recent trade price is lower than the previous trade price. A "zero-minus" tick refers to the last price being the same as the preceding price.
• In such cases, the buy minus order restricts the investor from purchasing the stock at a price higher than the most recent trade. This helps ensure that the investor does not overpay during periods when the stock’s price is in decline or stagnant.
2. Plus or Zero-Plus Tick:
• A "plus" tick happens when the most recent trade price is higher than the previous price. A "zero-plus" tick refers to a scenario where the price has remained unchanged.
• If the last trade occurred under a plus or zero-plus tick, the buy minus order limits the purchase price to the last sale price minus the minimum fractional change (i.e., the smallest allowable price movement for that stock). This effectively ensures that the investor is not buying the stock at a higher price than necessary.

Why Use a Buy Minus Order?

The buy minus order is primarily designed to protect investors from paying too much for a stock, particularly in markets where prices can fluctuate rapidly. It provides a safeguard, especially in cases where the market is uncertain or volatile, by ensuring that the investor cannot purchase shares at an overly inflated price.

This type of order is beneficial in situations where an investor wants to ensure that they are purchasing a stock at or near the most recent price, but without being exposed to price spikes that could occur after a recent rally. It’s commonly used when there is a need for more precise control over entry prices, particularly in active or volatile stock trading.

Example of a Buy Minus Order in Action

Suppose an investor wants to buy 100 shares of a stock, and the most recent trade was made at $50. If the stock has a minus or zero-minus tick, the buy minus order would ensure that the investor cannot pay more than $50 per share. This means the order will only be filled if the stock can be purchased at $50 or less.

If the most recent trade had a plus or zero-plus tick, and the minimum fractional change for the stock is $0.05, the buy minus order would allow the purchase only at a price no higher than $49.95 per share (the last sale price of $50 minus the $0.05 fractional change).

Advantages of Buy Minus Orders

1. Price Control: Investors benefit from the assurance that they won’t pay more than the last trade price or the adjusted price based on the tick. This offers control over entry prices, especially in volatile markets.
2. Risk Management: The buy minus order helps to mitigate the risk of entering the market at an undesirable price, thus reducing the chance of buying into a stock at an inflated price during a brief upward movement.
3. Reduced Slippage: By limiting the purchase price relative to the last trade price or fractional change, buy minus orders can minimize slippage—the difference between the expected price and the actual price at which the order is executed.

Limitations of Buy Minus Orders

While buy minus orders offer a level of price protection, they also have some drawbacks:

1. Order Execution Risk: If the market moves rapidly or if the tick changes, the buy minus order may not be filled at all. If the stock price moves beyond the limits set by the order (based on the last trade and tick type), the order will simply remain unfilled.
2. Limited Flexibility: A buy minus order is not as flexible as a regular limit order, especially in situations where an investor is willing to accept a higher price for the stock if the market has changed direction.
3. Market Conditions Impact: The order relies heavily on the most recent market conditions, which can be volatile. The effectiveness of the buy minus order depends on the consistency of the tick and the movement of the market.

Conclusion

A buy minus order is a useful tool for investors looking to control the price at which they purchase stocks, ensuring they do not pay more than the recent market price, adjusted by the tick. It offers significant protection in volatile markets, but also comes with limitations, such as execution risk and reduced flexibility. By understanding how buy minus orders work, investors can use them strategically to enter markets with more confidence and reduce the likelihood of overpaying.