Stop Order Acceptance

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Stop Order Acceptance

Post by Forum Mgmnt » Wed Dec 29, 2004 3:53 pm

We ran into an issue where a user reported that some of the stop orders as generated by VeriTrader couldn't be accepted directly by their broker.

In particular, the broker rejected trades where the close had already penetrated the stop.

For example, let's say you are long Crude and want to place your stop at $45.00 and the market closed at $44.90. The broker won't take a stop order at $45.00 since the stop is above the close.

Is this a universal restriction, or just one cause by a poor order management system on the broker's side? Do any of you have similar issues with stop orders?

It seems to me that the broker can ignore the close and just fill if it trades below the stop price. That's what I do myself. I don't see why the close has anything to do with a stop being valid or not. The price of the previous night is irrelevant.

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Post by DrHendricks » Wed Dec 29, 2004 7:04 pm

c.f. wrote-
the broker rejected trades where the close had already penetrated the stop
Forum Mgmnt, just to clarify are we talking real live broker or online order entry system?

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Post by Forum Mgmnt » Thu Dec 30, 2004 10:45 am

I'm not exactly sure. I've followed up but haven't heard back.

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Post by Ghostrider » Thu Dec 30, 2004 3:23 pm

Brokers and floor clerks are very particular about order titles.

By your description of this user it sounds like he/she doesn't understand the execution process very well, nor do they understand the difference between a stop loss and a sell stop. Moreover, it sounds like they waited to enter the stop loss, but I'm speculating, as usual.
In my view, this is not your problem.

If you are long crude at say 48.00 and you want to unwind this position at 45.00 at a stop loss. You must ENTER this stop loss trade in the market BEFORE it trades 45.00. No broker in the world will accept a liquidating sell stop loss at 45.00 AFTER the market trades through this price, it defeats the purpose of a stop loss.
Here's what the brokers sees: The market closed at 44.90, that means a 45.00 sell stop (NOT stop loss) is an order that needs to trade to 45.00 in order for it to be triggered (executed), who's to say crude won't gap open at 44.00 and trade down? Thus, a fill would never happen.

The only way out now, is to use a market order.

:P

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Post by Kiwi » Fri Dec 31, 2004 12:06 am

Or get a broker who understands that the instruction:

and if filled then Sell 5 Contracts at 45.0 Stop

means that a number from 1-5 contracts (depending on how many were filled) should be exited if the price trades below 45.0


If you look for my recommendations of brokers you will find two who will perform in exactly like that fashion (as agreed while confirming our communications).

John

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Post by Forum Mgmnt » Fri Dec 31, 2004 10:46 am

No broker in the world will accept a liquidating sell stop loss at 45.00 AFTER the market trades through this price, it defeats the purpose of a stop loss.


I never use stop orders so I'm unfamiliar with the specific mechanics of this. I've also never personally used a retail futures brokerage for execution.

It appears that the order should actually be something like:

1) If the market opens below 45.00 Sell at Market; or

2) If the market opens above 45.00 enter a Sell Stop

This is really inconvenient.

Is there really no way to tell a broker to sell if the price trades below 45 when the market the previous day closed just under 45?

This is really stupid for markets that open and close. It's not like the close of the previous day actually matters. If the market closed at 45.10 everything is fine. It closes at 44.90 and the brokers can't tell what to do when it gaps to 44.50 on the open? This doesn't make sense to me.

To me, a sell stop means "Sell if the price trades at or below this price", period.

I can understand their not wanting to accept stop orders on the wrong side of the market when the market is open, but when it is closed the open really could be anywhere. The close of the previous day does not affect the opening price except psychologically.

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Post by dcheval » Fri Dec 31, 2004 12:57 pm

If the market closed the previous day at 44.90 the broker can and should still take an order to sell at 45.00 stop the following day. If the market opens at or below 45.00 the broker will sell the contracts. Just before the opening, the broker will have an idea where the market will open. The previous days closing price is not relevant to the opening. The broker will look at the order based on the projected opening price. The same is true for a gap opening - if for example, the market closed at 45.20 - you enter a stop at 45.00 on the open - the market gaps down to 43.00 - the broker will sell the contracts.

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Re: Stop Order Acceptance

Post by edward kim » Fri Dec 31, 2004 2:00 pm

Forum Mgmnt wrote:We ran into an issue where a user reported that some of the stop orders as generated by VeriTrader couldn't be accepted directly by their broker.

In particular, the broker rejected trades where the close had already penetrated the stop.

For example, let's say you are long Crude and want to place your stop at $45.00 and the market closed at $44.90. The broker won't take a stop order at $45.00 since the stop is above the close.

It seems to me that the broker can ignore the close and just fill if it trades below the stop price. That's what I do myself. I don't see why the close has anything to do with a stop being valid or not. The price of the previous night is irrelevant.

- Forum Mgmnt
The general rule is stops go with the market, and limit orders "fade" the market. If the daily data that VeriTrader uses is correct, then VeriTrader is incorrectly generating the stop order. VeriTrader might have a problem of an exit/price crossover.

For example, suppose you use Turtle System 1 with a 10 day exit and the 10th previous day's low is at 41.60 and the 9th previous day low is at 45. Also suppose the price of crude is at 46. When you run VT that night, you generate orders for the next day and place a stop at 41.60. The next day, the market closes at 44.90, and your downloaded daily data shows a close and low of 44.90. VT shows that the 10th previous day's low is at 45, and the lowest low of 44.90 today is the number picked up. Since the current price/low price is at 44.90, VT can tell the user to sell ("cover" for short positions) "at the market" instead of issuing another stop order. If VT generates ANY stop value, that is not correct. If the markets never close, the trader is supposed to exit the position immediately (it is also nice if VT issues a sell or "cover" at the market signal every day until a new position is issued - this is a failsafe red flag for the trader.) If the trader does not exit, the trader is not following the system.

When you use data that does not have a close, then you might see this crossover problem depending on when you generate your orders.

Edward

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Post by Tim Arnold » Mon Jan 03, 2005 9:56 am

I've had orders rejected by the broker. Here is the message I received:

"Your order for the 2Yr T-Note to sell @ 105-26 Stop, the note went home yesterday @ 105-23. This is a sell stop above the market - broker rejected. Please cancel and replace."

I'm trading a turtle type system, so I generate new stop orders every night. Sometimes, as in this case, the new stop order for tomorrow is above the close for today -- but the market opens higher and the stop never ends up getting hit. So I don't know why the broker can't take the order and sell if the market opens at or below the stop.

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Post by Ghostrider » Mon Jan 03, 2005 2:50 pm

Hi Tim,
As usual I'm confused. Maybe, it because I don't have the full picture, so I'll guess about the situation.
In your example: If you're long at 106-00 and you want to stop out at 105.-26. You get long at 106-00 then once you get your fill you give your sell stop 105-26 GTC.....no problem.
I am lost with the order generation - it sounds like the system should belch out a market order instead of a stop order (if yesterday's close or today's close - however your system looks at time - is <105-26 then sell 100% of position on next open - market order). Again, no problem.
If you're trying to play around with your execution, like, sell if the next morning open is <105-26 but don't sell if we gap open higher than 105-26, though the close was 105-23, you have to watch the opening call. You might do this already. In this case, you have some hands on activity, it's not a big deal for some - for others it might be. Opening ranges can be a VERY slippery time (volatile), as I'm sure you are aware. The brokers at Refco, Mann, Cargill, Spear, Sleaze & Kellogg want very clear instructions, NO ordering off the menu if you get my drift.
On a seperate note, it's my experience, that the only brokers that will execute this last example are the floor moles, ahem, I mean brokers, that work directly for trading desks (like a Goldman, Sachs or Lehman Bros) or groups of independent traders (like Jones or Bacon. Maybe Dennis?). What's the old AMEX gold card saying? (When the gold card actually meant something). Wealth has its privileges....

:P

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Post by -w. » Tue Jan 04, 2005 8:13 am

dcheval wrote:If the market closed the previous day at 44.90 the broker can and should still take an order to sell at 45.00 stop the following day. If the market opens at or below 45.00 the broker will sell the contracts. [...] The same is true for a gap opening - if for example, the market closed at 45.20 - you enter a stop at 45.00 on the open - the market gaps down to 43.00 - the broker will sell the contracts.
That's exactly how it should be (and how we did it when I was a broker).

The point is where the market is trading at the moment when you enter your stop. If it's closed, it doesn't trade anywhere, per definition. So you should be able to enter any stop order off market hours. Once the market opens, there is a price and if this price has "traded through your stop", your stop order becomes a market order and will be executed at the market.

Every Live Broker will (have to?) accept that kind of order.

However, I suspect that this sometimes is different with automated order entry systems. Every order entry mask I've encountered has a "current quote/price"-field. If the market's closed, the current price often will be the last close. That could well be the reason why you're rejected, as the system finds your stop on the wrong side of its (in this case irrelevant) "market price".

I agree with c.f. that this is annoying. If a broker has an order entry system/mask that doesn't play by the rules, it's their responsibility to fix that, IMO.

-wojo

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Post by kianti » Tue Jan 04, 2005 8:47 am

Tim wrote:I've had orders rejected by the broker. Here is the message I received:

"Your order for the 2Yr T-Note to sell @ 105-26 Stop, the note went home yesterday @ 105-23. This is a sell stop above the market - broker rejected. Please cancel and replace."

I'm trading a turtle type system, so I generate new stop orders every night. Sometimes, as in this case, the new stop order for tomorrow is above the close for today -- but the market opens higher and the stop never ends up getting hit. So I don't know why the broker can't take the order and sell if the market opens at or below the stop.
Just an opinion, if you enter/exit positions on stops maybe you should have the system generating orders not based on close prices,i.e you should always have a stop order in the market to enter long or short;once you're in the market you keep always a stop order to exit positions and change it according to your system.
The risk is to have a stop price too close to the entry price,i.e while you get filled you have no time to enter your stop.
Other opinion, if you have a system generating orders based on close prices you should use orders for the next day at the open.
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Post by RedRock » Tue Jan 04, 2005 10:03 am

wojo wrote:
The point is where the market is trading at the moment when you enter your stop. If it's closed, it doesn't trade anywhere, per definition. So you should be able to enter any stop order off market hours. Once the market opens, there is a price and if this price has "traded through your stop", your stop order becomes a market order and will be executed at the market.

Every Live Broker will (have to?) accept that kind of order.

However, I suspect that this sometimes is different with automated order entry systems. Every order entry mask I've encountered has a "current quote/price"-field. If the market's closed, the current price often will be the last close. That could well be the reason why you're rejected, as the system finds your stop on the wrong side of its (in this case irrelevant) "market price".


-wojo
This describes my experiences at Man. Usually It was not a problem. The past few years I've not used resting stops thou.

On their Mtrade web platform, they have begun routing all currency and cbot rate contracts to Gbx/ecbot, {can no longer send "small" size to the pit}. Regretably, the pits are being bypassed. This will no doubt have an impact on traditional 'day stop' orders. They would have to be entered at the time of the pit open to simulate a day stop. In that case, one would place eithor a stop or market order as its based on trading price. Seems technology is making our lives more difficult at the moment...

redrock

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Post by shakyamuni » Tue Jan 04, 2005 12:01 pm

Another annoying thing about brokers is that they won't take my "Buy-Sell Market in Past" orders.

This is where I look through historical charts and find trends, then tell the broker to get me in at the market at the inception trend, sell me out at the market at the end of the trend, and keep a nice commission for themselves.
Last edited by shakyamuni on Sat Jan 08, 2005 4:50 pm, edited 1 time in total.

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Post by -w. » Tue Jan 04, 2005 1:41 pm

shakyamuni wrote:However, in the case of an OMS for spot forex, it might make sense to reject stop orders to sell below the current bid, since trading is live 24/7 and such an order is more likely to represent an error on the part of the trader or the platform generating the order.
Exactly.

Also, many traders are not familiar with the specific feature of a stop order, namely that it becomes a market order after the stop is triggered. Especially in the Forex market, as there is no UpTick/DownTick Rule, smaller orders almost always get executed at the Stop level. This adds to the confusion and certainly warrants an error warning.

The only workaround I can think of would be to code the order entry system (for Forex only, mind!) something like: If <error message> then <inx: market>.

Of course that would be plain wrong for all other "non 24h"-markets. If the broker's order entry system has this specific fault, automated order entry with that broker will just not be possible, I guess.

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Post by Jimbo » Mon Dec 05, 2005 4:40 pm

This happen to me today - TBB generated an order to sell Coffee at 95.83 and it opened below that, so the broker kicked it back. (a negative entry offset on the turtle system was to blame) But since it kept me out of the market while it rose 1.1, I can't say I'm too upset. :)

I may be showing my ignorance here, but could this be got around by using limit orders?

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Stop Orders

Post by Trade Center » Fri Dec 09, 2005 12:19 pm

Especially in the New York markets, this is the situation in which having a good relationship with your broker and in turn, your brokers access to good order fillers on the floor is critical. If your broker knows your preference, he or she can communicate that to the floor and execute as you like. Is this more costly, yes and no. A broker may charge more than an all on-line platform, but how costly lis it to miss whole moves when you find out an hour after the market opens that your order was rejected and now the price is substantially different than the open.

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Post by Wisdom » Thu Jan 05, 2006 1:59 pm

The problem here lies in the traders experience. If you are running your own system and placing the orders through an online platform its important to understand each order type and how they must be placed. For example, sell stops can not be placed higher than the market close, and buy stops can not be placed at a price lower than the market close. Those orders are considered "through the stop" and will always be rejected by any electronic system and most floor clerks. Remember, computers cant think, they just follow orders, and clerks are much the same.
If your systems trigger a trade that states that you should sell at 45.00 on a stop when the market closed at 44.90, the trader either needs to interpret that as a market order and place that ahead of the open, or wait for the open (if you are anticipating a gap up above 45.00) and place the stop at that time (assuming the market is above 45.00 of course).
This is really where a system assist broker comes into play, in being able to interpret these issues and either take action based on your communicated plan or contact you prior to the open to assess the situation.
Shane Wisdom
www.wisdomfinancialinc.com

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