Stop Orders: Vestige of a Bygone Era?

My latest at Alpha Baskets looks at the extent to which some investors “got hosed” on stop orders that elected during that 10 minute, 1100 point swoon on Monday. As I discuss in the post, something seems to have changed with the exchanges’ reliability and how they execute orders. While it would be great to solve these issues, it is for now most important to be aware of them.

Earlier in the week I was joking with a colleague about how in the 1990’s the online brokerages had outages or other forms of disruption all the time, it was after all the dawn of the internet as a household utility, but that the exchanges never had problems. Somewhere along the way that reversed, brokerage downtimes have all but disappeared while at the same time between the flash crash of 2010 and a couple of failed IPOs (as in failed execution) the exchanges regularly send someone on stock market television to reassure participants that things are working.

Please click through to read the entire post.

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  1. Roger, I remember that post you linked to in the Alpha Baskets link. My broker offers stop orders, where the order becomes a market order when your stop price is achieved; but they also offer a stop limit order, where a sell order is triggered when the stock achieves the stop price but the sell order will not execute at a price below your limit price. I have used the stop limit order once and may use it in the future, but will never use the basic stop order again due to the situation you discussed in this post.

    • be careful for the recoil, meaning something like the flash crash or other distortion. Your stop limit at $30 on a stock that was at $40 gets elected on a gap down to $20 and you now have a limit in at,say $29, the distortion the corrects itself and the stock then races up, executes your limit at $29 and closes the day at $40 where it started all while you are doing errands. Extreme example but this is essentially what happened.


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