Discretionary Orders: Meaning, Examples, and Discretionary Investment Management

Key takeaways

• A discretionary order (also called a “not-held” order) gives a broker limited latitude to execute an order — for example, to adjust timing or price within pre‑set bounds.
• Discretion commonly attaches to conditional orders (limit, stop‑loss) via a small discretionary amount (often quoted in cents).
• Discretionary orders increase the chance of execution while keeping some investor constraints.
• Discretionary investment management lets an authorized manager make buy/sell decisions on a client’s behalf; it requires a signed authorization and typically applies to larger accounts.

What is a discretionary order?

A discretionary order allows a broker or trading desk to act without getting the client’s explicit approval for each execution detail. The broker may vary price or timing within limits the investor sets so an order has a better chance of filling under changing market conditions. The term “not‑held” is often used interchangeably.

How discretionary orders work

• Investors add a discretionary amount to a conditional order (usually limit or stop‑loss).
• The discretionary amount sets how far a broker may move the order price to seek execution (often a few cents).
• Orders can be placed electronically or through a broker-dealer, and can be day orders or good-til-canceled (GTC) orders.
• Broker-dealers monitor discretionary orders and are expected to seek the best available price for the client. Using discretion to pursue “best execution” generally protects brokers from liability for market-driven losses, provided they act in the client’s interest and within the authorized limits.

Common examples

• Buy limit with discretion: Investor places a buy limit at $20 with a $0.10 discretionary allowance. If the market reaches $20.08 or $20.10, the broker can submit and execute the buy order at any price up to $20.10.
• Sell limit with discretion: Investor places a sell limit at $24 with $0.10 discretion. The broker may accept slightly lower executions (e.g., $23.90) to complete a sale when market liquidity is changing.

These small adjustments can improve execution probability without giving the broker unlimited freedom.

Discretionary investment management

Discretionary investment management (managed accounts) means a portfolio manager is authorized to make trading decisions for a client without obtaining approval for each trade. Key points:
* Clients sign a discretionary agreement that specifies the manager’s authority, objectives, restrictions, and fees.
This service is usually offered to clients with substantial investable assets and may carry minimums and asset‑under‑management (AUM) fees (commonly quoted as a percentage of AUM).
Because managers act without prior client approval for each trade, clients must trust the manager’s expertise and review the manager’s strategy and disclosures carefully.

Risks and safeguards

• Risks: potential for misunderstandings about limits or investment goals, and market losses if discretion is exercised poorly.
• Safeguards: clear written authorization, documented investment objectives and limits, periodic reporting, and regulatory duties (brokerage firms and advisors must follow best‑execution and suitability/fiduciary standards as applicable).

Summary

Discretionary orders let brokers adjust certain execution details within investor‑specified bounds to improve fill rates. Discretionary investment management extends this principle to portfolio trading, where an authorized manager makes ongoing decisions for the account. Both approaches offer convenience and improved execution potential but rely on clear authorizations, defined limits, and trust in the professional executing discretion.