NYSE Kills ‘Land Mine’ Order Type Some Blame for August Mayhem

Discussion in 'Wall St. News' started by dealmaker, Nov 26, 2015.

  1. dealmaker

    dealmaker

    Traders Magazine Online News, November 23, 2015

    Annie Massa


    inShare

    (Bloomberg) -- The New York Stock Exchange is eliminating an order type that investors including BlackRock Inc. blame for exacerbating extreme share-price swings on Aug. 24.

    Stop orders -- or instructions to immediately trade once a stock hits a certain price, even if the price is far worse than the one on the order -- will no longer be available starting on Feb. 26, NYSE said this week.

    Hundreds of securities posted unusual moves on Aug. 24, including bellwethers like General Electric Co. and JPMorgan Chase & Co. that plunged as much as 21 percent only to quickly recover. BlackRock, the world’s biggest asset manager, analyzed the events of that day and concluded that stop orders -- among other factors -- contributed to losses.

    "Stop orders are like land mines," said James Angel, a financial markets professor at Georgetown University. "They blow up in ways that are unanticipated by the people who plant them."

    Stop orders work like this: A customer requests that 1,000 shares of Company X get sold once the price falls to $20. But $20 isn’t guaranteed. If the stock plunges from $30 to $10, without hitting any intermediate prices first, the stop order might get executed at $10. According to BlackRock, that’s a surprise to some small investors.


    Teaching Investors


    On Aug. 24, “retail investors who had standing stop-loss orders were especially impacted -- once the stop price was reached, the orders were converted into market orders, which were often executed at prices that were markedly lower than the stop price,” according to BlackRock’s report. “As stop-loss orders are typically intended to be used to mitigate losses, investor education about the risks of stop-loss orders should be significantly increased.”

    In the past six months, fewer than 0.3 percent of orders on NYSE were stop orders. NYSE is also discontinuing a type of order called "good-till-canceled" that remain active until an investor decides to cancel it or the trade has been executed, the exchange said in its notification this week.

    Stacey Cunningham, NYSE’s chief operating officer, said that in conversations following Aug. 24, retail investing firms frequently raised questions about stop orders to the exchange.


    Not Insurance


    "The circumstances around stop orders have changed," she said. "A lot of investors use stop orders thinking it’s an insurance policy. The perception is they limit losses, and that’s just not the case."

    Brokerage firms can still program their systems to carry out orders that achieve the same results as a stop order for their clients, by entering a market order on the client’s behalf after a stock price reaches a specified threshold.

    Nonetheless, Cunningham said, the exchange wants "to raise the profile of the risks associated with this order type."
     
  2. LOL, blame the "order type" instead of fixing the underlying problem...HFT "liquidity providers" don't provide liquidity when stocks get active. They thin out and widen the spread to ridiculous proportions
     
    Tsing Tao, Cswim63, tommo and 2 others like this.
  3. zdreg

    zdreg

    maybe not.
    http://www.cnbc.com/id/44337362
     
  4. d08

    d08

    That whole research is based on falsehoods - yes, HFT might lower volatility during normal times when when the SHTF, they pull all orders and it's a freefall/massive increase in volatility. We saw this in August and during the flash crash. Those are the times you need markets the most.
     
    Chubbly likes this.
  5. That article is over 4 years old.

    Any active trader knows HFT is nowhere to be found when you need liquidity most.
    Just look at any chart when a stock has news. There is a massive black candle due to a liquidity vacuum, then HFT finally provides liquidity at the exact top or bottom before the immediate snap back.
    It's risk free trading and blatant theft.
     
    Tsing Tao and d08 like this.
  6. d08

    d08

    Exactly, HFT provides liquidity when you LEAST need it, like a friend who's only around for the good times.
     
  7. zdreg

    zdreg

    you make it sound like the specialist on the floor on the nyse or the market makers on nasdaq in the "good old days." maybe it is time to pick up old books by richard ney. "The story is told that after he had been deported to Italy, Lucky Luciano granted an interview in which he described a visit to the floor of the New York Stock Exchange. When the operations of floor specialists had been explained to him, he said, 'A terrible thing happened. I realized I'd joined the wrong mob'" (1Ney, 8). <http://w3.tribcsp.com/~fredj/ney.html>)
    in any case you don't know what is going on in dark pools at these times. if your broker doesn't allow routing to dark pools you will get clipped.
     
    Last edited: Nov 27, 2015
  8. mbbcat

    mbbcat

    Insurance costs money - the only real stop is a long put / call & that maybe about to get a whole lot more expensive

    What was not mentioned above is that BOTH Nasdaq & NYSE are ending GTC orders as well as stops.

    ? anyone smell something burning - like a meltdown about to happen?
     
  9. Chubbly

    Chubbly

    They are just covering their ass from lawsuits from retail traders.
    Your broker can still create these orders and hold them at their end.

    I had Stop Limit orders in on Aug 24 and they got jumped way past them
    Protective Puts/Calls work well but not cheap, but I do like them better
     
  10. d08

    d08

    Just today IB instituted this rule on equities due to it being forced onto them by the exchanges. If you want the ceiling to be changed, you have to do it PER ORDER by contacting IB support - no, I am not kidding, one order at a time like it's 1985.
    It's downright absurd at this point. I'm all ears regarding workarounds to this pure malicious stupidity.
     
    #10     Dec 1, 2015