In trading, a discretionary order placed by an investor to a broker which instructs the broker to increase the bid for the desired securities or assets up to a maximum limit specified by the investor.
Discretionary orders are used to prevent price inflation when placing large orders for specific assets or securities. This is accomplished by slowly increasing the bid sent to the exchange rather than sending the high bid which an investor is willing to pay for the asset or security.
Example: An investor wants to go long on the coffee market by buying 100,000 kilos of coffee because they believe that weather events will lead to a poor harvest of coffee that year. They are willing to pay up to 60 centimes per kilo – well above the going market price of 40 centimes per kilo – because they believe the price will climb to around 1 Swiss franc per kilo after the harvest season. If their broker were to send their 60-centime bid to the commodities exchange, the sudden high bid would trigger sellers to suddenly raise their prices to match. The resulting hike in the value of coffee would likely cause other investors to bid for coffee at higher rates as well, which could drive the price even higher than the 60-centimes which the investor was willing to pay.
By using a discretionary order, the investor gives their broker the authority to bid just over the 40-centime going rate and to raise the bid at their discretion if the price climbs – but only up to a maximum of 60 centimes per kilo. Because the bid sent to the exchange by the broker remains very close to the going market rate, sellers do not raise their prices significantly and a run on coffee by investors is avoided, allowing the broker to fulfill the order at the best possible rates.