The New York Stock Exchange (NYSE) announced in mid-November the decision to eliminate stop orders and “good-till-canceled” orders…
Apparently the thinking is that stop loss orders are dangerous to investors. Say the price is at $20 and you have a stop loss at $19. If it opens at $17 because of some temporary event, your order becomes a market order and you get sold out at $16.75 or so, where you might not have wanted to sell. And your sale, and other stop losses, push the market down further and accentuates the wild moves.
Can you still set a limit stop loss which would not trigger the same cascade?
I don’t have a clue Denny, as I never use stop losses. Probably best to ask your broker. And, as far as I know, this only applies to the NYSE, not the Nasdaq.
When I place a GTC order with my broker they cancel it at the end of each session and place it anew the next session. I use lots of limit GTC orders but no stop loss orders.
I had read the news earlier and wondered about their motivation. If their motivation is truly to prevent runaway markets then they should have no problem with limit stop orders. I was thinking they just wanted to save on the administration of stop loss and GTC orders.
Can you still set a limit stop loss which would not trigger the same cascade?
You can, but in the example Saul gave, your limit would have been exceeded and you still have long shares. There is no protection for an immediate drop.
And why would you want to do that? Wouldn’t you want to assess the market before taking action? Why not just set an alert?
“Brokerages may still offer these kinds of orders to their consumers, the NYSE spokeswoman said, but the orders will no longer be available directly from the exchange.”
As I understand it, they just won’t hold stop orders on the NYSE floor book anymore, but they will still be able to be used.
While I don’t disagree with the argument that stop loss orders can contribute to contagion selling and flash crashes, most brokerages outsource (read: sell) their stop loss orders to HFT firms like Fidelity does with Knight Capital.
I actually think this is more of a lobbying win for HFT firms than it is a move to protect investors. About 80% of market making is done by HFT firms now. On 8/24, they actually stopped making markets which exacerbated the flash crash more than stop losses as there was no liquidity for anyone that was selling for any reason (stop losses included of course)
If you decide to use them, stop limit orders are safer as they ensure you won’t get a horrible price if something gaps down. However they do not ensure that you will get taken out of the position if you stock gaps below your trigger level and your limit level. No way to completely remove all risk.
I guess I am missing the point*. I can understand how a stop-loss SELL order can screw the person who put in the order, the sale might happen at a price far below the price specified. However a limit good-till-cancelled BUY will charge me no more than I was willing to spend, just as a gtc limit SELL order will never pay me less than I am asking for.
Stop loss orders sell create a market order when the level of the stop is triggered. Stop limit sell orders create a limit order at the price you specify in the limit if the price you specify as the stop gets hit.
Basically both are conditional type orders where the stop price is the condition that triggers the order (market or limit) to be placed.
Meant to clarify, hit submit too early.
I also think most people don’t realize that stop orders are a market order and that the price you set the stop at has nothing to do with where it gets filled or the price you are willing to sell. Ideally if things are operating orderly, it should fill within a penny or 2, but that isn’t guaranteed
Thanks for that. I think I already understood Stop Loss orders.
I still don’t “get” what the problem is with good-till-cancelled. I can’t see what good-till-cancelled does for you unless you set a limit price. Once you set a limit I don’t see where there is a problem.
I use Limit orders all the time, often at or around the market price. Sometimes I put in a buy limit order with a low price with good-till-cancelled with a termination date a few days or weeks out. Sometimes I put in a sell limit order with a high price, again with good-till-canceled a few days or weeks out. Either way my exposure is exactly the price I put in or better.
Sorry, misunderstood your question. I think the GTC thing is the same, as most people place stops with GTC status so they don’t have to place them every day. Either way they will be held by your broker (or whoever the broker outsources management of these trades through… usually an HFT firm), rather than held on the NYSE order book.
The rule change will likely be transparent to the average retail investor, and you will be able to still use both orders types as long as your broker supports them.
So why GTC as well? My guess is that it’s costly to maintain the book for the exchanges and they get nothing for doing so. But brokers will make money selling the execution of these trades to HFT firms who will make money skimming their fractions of pennies off the top and by running stops when large blocks accumulate at obvious prices.
I don’t think there is any “problem” with the order type per se, just that the firms lobbying for execution of these trades seek to profit more when they can handle them. Just economics and spin. Sadly a cost of doing business when trading/investing today
I still don’t “get” what the problem is with good-till-cancelled. I can’t see what good-till-cancelled does for you unless you set a limit price. Once you set a limit I don’t see where there is a problem.
The reason is simple. Back in 2010 in the height of the flash crash the price of ACCENTURE fell from $40 to 1 cent.
That was due to stop loss order changing to market orders on that good company.
With the volatility that was prevalent around last summer I went and put a limit order buy Good Till Cancel with 50% discount on a company that I liked a lot.
On August 24th it almost worked.
So in short, both trading tools can take advantage of people making the mistake and putting a sell order with no limit (market order). This specifically true for volatile markets like we are having in late years (With Algo Trading being the major factor).
I have only ever used a note on my desk, written with a pen! I only use a stop-loss on the rare occasions when what had been an investment, or even a speculation, turns into ‘mad momentum’.
It is most unwise to say ‘this stock is madly over-valued, I sell’ because the noted stop-loss (price-to-sell updated daily) gives the opportunity to ride the momentum with the relaxation of complete safety and enjoyment. You are fully insured. (Avalanches are extremely rare.)
DDD was the most recent example. The thing went mad beyond belief and an initially wide stop loss, tightened as the fun went on, ensured a good outcome.
