A cancel order involves choosing to delete an order to buy or sell securities at some point before the broker begins the process of executing the order. Even if the process is in the earliest stages, there may be a slim chance of voiding the order and thus averting a transaction that the investor has determined in not in his or her best interests.
The process for submitting an order usually involves the investor authorizing a broker to buy or sell securities, within a given perimeter of guidelines relating to the transaction. Often these perimeters will include a time frame in which the investor would like the buy or sell order to be completed. Once the broker receives the order, it is not unusual for the brokerage firm to process the transaction through a financial specialist or market maker at a stock exchange. If the investor issues a cancel order before the broker begins the processing, there is very little to do. The broker voids the order to buy or sell, and the matter is considered closed. However, if the request has already been submitted to the market maker, it may or may not be too late to cancel the transaction.
Fortunately, brokers usually line up transactions in the order they are received from clients, so there is often a little time in between the submission of a buy or sell order and the actual execution. In like manner, money makers usually have a time line for completing and stock orders based on the order of receipt. This creates a very slim possibility that a cancel order may be forwarded from a broker to a market maker and thus void the order before it hits the stock market. However, investors should understand that once the original order has been passed on by the broker, the chances of issuing a cancel order successfully to the market maker is extremely low.
While cancel orders are a necessary tool when it comes to managing stocks and other investments, most investors make it a point to not rely on a cancel order to correct an error in judgment. Instead, investors will strive to do their homework before ever placing an order to buy or sell, thus making the issuance of a cancel order irrelevant.