Some agricultural commodities are very thinly traded, going long stretches of the day without a single trade. On these, market orders aren't allowed. You can place only limit orders, so you always set the price yourself instead of accepting whatever the book happens to be offering.
Why are market orders blocked on these commodities?
A market order fills at the best available price, whatever that turns out to be. In an illiquid agri commodity, where there are very few buyers and sellers and long gaps between trades, that cuts two ways:
- You may not be able to exit. With so few participants on either side, closing a position when you want to can be impossible. If you can't get out before the contract expires, it can be marked for physical delivery of the commodity itself.
- The bid-ask spread is wide. With a large gap between the buying and selling price, a market order can fill far from the price you expected.
A limit order removes both surprises. You decide the price you are willing to trade at, and the order will not fill anywhere else.
What should I do instead?
Place a limit order at the price you want. If you want it to fill quickly, set the limit close to the current market price, and you still keep control of the price. If the difference between the two order types is new to you, start with what are limit and market orders.
Things to keep in mind
- The block applies to the market order type only. Limit orders work normally on these commodities.
- It applies to specific illiquid agri commodities, not to commodities generally. Actively traded contracts like bullion, energy and base metals accept market orders as usual.
- Exiting an illiquid position is hard, so size these trades carefully and don't leave them open near expiry. A position you can't close can go to physical delivery; see how are commodity contracts settled. The same restriction applies to thinly traded stocks and bonds, covered in why are market orders blocked for trade-to-trade and debt category instruments.