What best describes a contingent order?

What best describes a contingent order?

• A. It is executed at will of the broker
• B. It becomes active after the fulfillment of another order
• C. It is valid until cancelled
• D. It cannot be cancelled once placed

Answer: (B)

A contingent order is defined as an order that becomes active only after a specified condition or another order has been fulfilled. This means that the execution of the contingent order is dependent on an event occurring, such as the completion of a previous transaction or reaching a certain price level. This characteristic allows traders to create strategies that manage risks and automate aspects of trading based on market conditions.

In contrast, the other definitions do not capture the nature of a contingent order accurately. An order executed at will of the broker suggests a level of discretion not inherent to contingent orders, which rely on predetermined conditions. An order that is valid until cancelled indicates a standing order that continues until the trader decides to cancel it, rather than being contingent upon another event. Lastly, a contingent order can typically be cancelled by the trader before the condition is met, contrasting with the notion that it cannot be cancelled once placed. This understanding is crucial for managing trading strategies effectively within the framework of professional conduct.