Stop order execution

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Chuck B
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Stop order execution

Post by Chuck B » Tue Apr 24, 2012 8:18 pm

Ok, I admit it, I've been trading way too long. 30 years or so in stocks, 22, 23 years in futures. I've not traded (seriously) in stocks for the past 8-9 years or so, only longer term trades, some held for years, some not. I've always used stops, and until today, never came across an issue with a stock stop order.

Sometime back (8 years or so) my stock broker (and apparently many (most?) others) changed the way they execute stop orders. It's not a "real" stop order now. A sell stop is what traditionally would be called a stop bid order, and a buy stop is what traditionally would be called a stop offer order.

This bit me today in VMW where I had a sell stop at 102.64. The stock never traded below 102.66; however, my "stop" was elected and filled (at 102.69) by the NBBO bid going below my stop price. This was news to me. I've been trading futures for too long I suppose, but since MFG/Corzine stole my money and even though I have a good portion of it back, I've not traded any in the futures markets since October.

So, apparently "stock brokerages" these days treat "stop orders" as really what should be called (and have always been called) stop bid orders (for sell stops) and stop ask orders (for buy stops). EDIT: apparently, they treat a sell stop as elected if an offer prints at or below your stop price (not a bid) and visa-versa buy stop. So even though a trade never occurs, it only takes a NBBO offer to touch your price to trigger a sell stop. Rest is still the same -- invalid (to me) stop order execution and out-of-sync system versus market position.

Now it is exceedingly easy to have any system get out of sync with the market since you never get a trade, a print, at your stop price, so your system is still long, but your "stock ""broker""" elects your stop order since the NBBO bid was under your price.

Interestingly, I've found different definitions of how a stop order will be filled on this broker's web site depending on where I look. I understand that it is not only "my" brokerage firm that executes stops in this manner.

So anyway, just venting about what I consider an invalid fill and surely what my system KNOWS is an invalid fill.

How do you stock traders handle this new (i.e. this broker changed to this method about 8 years ago apparently) way stock brokers consider stop orders to be elected? How do you backtest and have any confidence in properly executing stops in your backtest? I don't think you can. Not unless you have continuous data for NBBO bids and asks in addition to actual trades. How do you trade a system in real time and not get out of sync with how your broker will execute stop orders versus what your system sees with last trade data? I don't think you can.

Am I the only schmuck that has a problem with this issue?

P.S. I find myself, uncharacteristically, being extremely short and quick tempered when dealing with brokerage firm representatives...I suppose thanks to being Corzined. Sigh...I need a new brokerage firm, the only problem is that I trust NONE OF THEM and am very wary of moving assets to another firm. They all will have major problems when and if the **** hits the fan.

rhc
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Post by rhc » Tue Apr 24, 2012 11:31 pm

Chuck,
That doesn’t sound right to me.
If I understand you correctly your stop triggers if someone’s Bid is lower than your stop price NOT if the Current Price is lower than your stop price.
If so, then what prevents me from 'running the stops' by putting in a Bid to buy at some ridiculously low level ?
Of course if other bidders are above me then I can't do it but every now & then I would catch something I’m sure. It seems open to abuse.

Anyway . . . . ,
I have an account with Interactive Brokers.
My understanding of Stop-Orders with IB is as follows;

If I am long 1000 ABC stock currently trading at $20 & my protective stop loss order is at $15.
Then;
If Price (i.e. real trading activity) touches or penetrates $15 then my stop loss order is immediately converted to a ‘Sell at market’ order that will be filled at the bid.
If the bid is at $14 then that’s my fill.
Note that PRICE is the trigger here not the BID
This applies to both Stocks and Futures and applies to both entry stops & exit (protective) stops

Some exchanges do not “natively execute stop ordersâ€

Moto moto
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Post by Moto moto » Wed Apr 25, 2012 4:49 am

Also check out this part of IBs help section....especially the Double Bid/Ask section.

http://www.interactivebrokers.com/en/so ... ame=ibskin

I never used stops to trigger automatically on stocks mainly for the reasons of liquidity and gaps.....and hence have never run a tested portfolio of stocks as such. As I really only traded one market and realised that everything became correlated when the s,,t hit the fan and normally as the market moved as one and all leaky boats float we used options to protect ourselves.
The only testing we did had best guesses based on closing prices
In Australia they have two closes. One at 4pm, and then a match out price to complete orders via a crossed auction system. You can generally get filled pretty close to the EOD prices unless you are in a very illiquid stock (which happens a lot).

Chuck B
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Post by Chuck B » Wed Apr 25, 2012 5:46 am

Upon further interaction with said brokerage (after being told different stories than what was specified on their web site, and finding different definitions of stop order execution on different sections of the web site, and finding different execution for "listed securities" versus OTC), the net of this is that a "stop" order to them (and apparently the default stop order for many other stock brokerage firms these days) is not a traditional stop order which requires a print at the stop price to be elected.

Instead, for sell stop orders, they are actually sell stop offer orders and visa-versa for buy stops really being buy stop bid orders. So I had it wrong before. Their sell "stops" are not stop bids but stop offer orders.

I see Interactive Brokers allows you to define how you want a stop order executed, and I see I can do that at this broker too. However, a default stop order is NOT what has (since the beginning of time for me anyway) always been known as a stop order.

From my experience today, I do definitely know for absolute certain that when the **** hits the fan, you really want to hope you have no issues with standing orders and also don't have to put in any new orders to a system. One's ability to get help with exceptions/problems will be gone for days perhaps under such scenarios. \

There is no stress testing being done on brokerage firms, and NONE of them will be able to provide customer service for issues/exceptions/problems when the crunch happens. However, this is apparently fine, and I'm the idiot of course for being a customer. I mean if Corzine and company can steal over a billion dollars from customer segregated accounts, and that is fine with our system, our regulators, our authorities, then that has set the gold standard in this whole industry for how "problems" will be dealt with....

Moto moto
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Post by Moto moto » Wed Apr 25, 2012 9:29 am

When ever a customer has a problem then the customer services manual says the correct response is - "But nobody else seems to have that problem"

This is why you may as well be with a discount broker. At least you get what you pay for :)

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