Stock Exchange Eliminates Stop Loss and Good till Cancel Orders

AppleThe New York Stock Exchange has announced that on February 26, 2016 they will no longer accept a Stop or Good till Cancel Orders. Many investors use “stop orders” to protect their investments, or so they think. There are many forms of “stop” orders, such as Stop Loss, Stop Limit, Training Stop Loss, etc.

Here is an example, you bought 100 shares of Apple (AAPL) @ $90/share awhile back, and it is now $118/share. You want to protect some of your gains so you entered a Stop Loss Sell Order, Good Till Cancelled @ $100/share. Therefore if Apple drops to $100/share it will automatically sell and you’ll have a profit of $10/share. You can also set a higher sell price, for example, if Apple hits $125/share sell automatically to lock in your profits. The old theory was that every time you buy a stock or fund you also enter a high and low sell price.

However, here is why this doesn’t work so well.

The Stop Loss price, $100 in the above example is not necessarily the price you will get on a volatile daily drop. What happens behind the scenes is that as the stock hits your Stop Loss price of $100, it becomes a “market order” and sell at the immediate “market price”.

However, on a very volatile day like the “flash crash” in August 2015 a momentary, intra-day sharp drop in prices triggered an avalanche of selling and all these Stop Loss orders were hit, but not at the price you would expect.

During a momentary flash crash your $100 Apple Stop Loss price, became a “market order”, but because of the crash the momentary price for Apple dropped below $90, even for a few moments. You stock would have sold for maybe $80, far below what you thought was “a protected” price. Of course moments after you stock was sold for $80, Apple jumped right back up to $108 price for that day. See the Apple daily stock chart above.

In theory the Stop Loss concept was very good, however in the current day of computer trading with 60% of daily volume coming from high-frequency trading there can be unintended consequences.

Don’t fear however, even though the NYSE won’t accept Stop Loss and Good till Cancel orders next year, most major brokerage houses will offer internal systems that should handle your orders in a similar way.

 

 

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