The logic of IB Nasdaq Stop Orders?

Discussion in 'Retail Brokers' started by stock_punter, Sep 18, 2001.

  1. Hello,

    Can someone please explain the logic behind Interactive Broker's implemenation of stop orders for Nasdaq stocks?

    I'm not looking to debate how unusual their implementation is: It's been done before on the boards and clearly we can all agree that it's unusual.

    What's not clear to me is why IB chose to implement the stop in this manner. What advantages does this methodology give the trader?

    I asked IB's help this question, and their response was: "The reason why we have this logic on the NASDAQ stocks
    is due to the volitility on the Stock."

    This is a pretty weak response: there are many large cap stocks on the Nasdaq that aren't that volatile.

    I'm hoping that one of you can provide a more logical reason than this.

    Thanks.

    -- Punter.

    P.S. Here's how IB handles stop orders for Nasdaq stocks:

    "In regards to NASD stocks and US equity option, IB will elect Buy-Stop orders only after we see a bid at the stop price and subsequently confirm a second bid. Only after we confirm a second bid will we send in the order. Likewise, IB will elect Sell-Stop orders only after we see an offer at the stop price and subsequently confirm a second offer. Only after we confirm a second offer will we send the order."
     
  2. def

    def Interactive Brokers

    with so many ecn's too many incorrect triggers were occuring due to bad prices or crossed markets. can't have one rule for liquid stocks and one rule for illiquid ones as it would be too confusing.
     
  3. Turok

    Turok

    >Can someone please explain the logic behind
    >Interactive Broker's implemenation of stop orders
    >for Nasdaq stocks?

    I can't explain IB's logic, because I'm not IB. I can explain why I might choose the same logic if I were programming my own system...

    First, I wouldn't use prints as a trigger since they occur all over the place and separating what is a good print from a bad print from a block print is a nightmare.

    I wouldn't use only a single bid to trigger a buy order since "cranks" (a term for a phony bid/offer flashed just long enough to be seen, but not long enough to be significantly hit) can and will flash essentially meaningless bids/offers fairly regularly. In stocks with significant spread this could really screw up the trigger.

    Requiring two bids at or beyond the trigger point makes a lot of sense to me since it helps to filter out the above situation and signals some sort of price consensus.

    The last thing I want is my order triggered by a crank.

    JB
     
  4. Turok

    Turok

    >IB will elect Buy-Stop orders only after we
    >see a bid at the stop price and subsequently
    >confirm a second bid.

    On question for Def...

    If the behavior is *exactly* as worded, the following will happen:

    Current stock price $24.40
    Buy stop trigger $24.62 (short cover)

    If the price climbs through $24.62 without a second bid at $24.62 EXACTLY, then the stop isn't triggered even if the stock price moves to $25.00 and beyond. What I think you would want is a second bid at *or beyond* the stop price to trigger the order.

    If it really works as written than I think it's a poor trigger. As written, a stop at a nice round number would likely trigger quite nicely as bid/offers tend to congregate. If a stop is placed at an odd value it might *never* trigger if no two traders happen to bid the same odd value.

    Can you clarify Def?

    Thanks

    JB
     
  5. def

    def Interactive Brokers

    turok,
    it should work as you describe. thanks for pointing out the language. I'll pass the infomation along for someone to correct.
     
  6. Turok

    Turok

    Sorry for the precision coming next, but by now you already recognize that I like to be pretty detailed in my understanding of things.

    >it should work as you describe. thanks for
    >pointing out the language. I'll pass the
    >infomation along for someone to correct.

    Meaning that it doesn't work as I describe, you think it would be best if it did work as I describe, thanks for describing it and someone will correct it.

    OR

    You are pretty sure it works as I describe, thanks for noticing the problem in the IB description and someone will correct the description.

    I'm betting it's the latter.

    JB
     
  7. Turok

    Turok

    Also,

    Two bid/offers are required to trigger the order. The new description needs to make it clear whether this is serial or parallel behavior. In other words, must both bids be displayed at the same time, or is the first "crank flash" the first bid and when the same crank later flashes again this is the second bid.

    JB
     
  8. def

    def Interactive Brokers

    turok,
    i'm glad I got caught up on the trading end today as I neglected to send your post to the states till now. I'll send your further mails.

    To clarify.... i was told that the way stops work is the way you believe they should work. hopefully you'll get a new write-up in a day or two.
     
  9. Magna

    Magna Administrator

    "In regards to NASD stocks and US equity option, IB will elect Buy-Stop orders only after we see a bid at the stop price and subsequently confirm a second bid. Only after we confirm a second bid will we send in the order. Likewise, IB will elect Sell-Stop orders only after we see an offer at the stop price and subsequently confirm a second offer. Only after we confirm a second offer will we send the order."

    This may have been clarified elsewhere, and ignoring the logic of the double-hit requirement (I read Turok's take on it), it seems that things are backwards.

    Let's start with a Sell-Stop, say, on a Long. As most are filled at the bid (or below), unless you are simply offering the stock, then I don't understand the logic of:
    IB will elect Sell-Stop orders only after we see an offer at the stop price .
    In other words, why would the execution of a sell-stop be based on the offer (ask) when it will probably be filled at the bid???

    Likewise, for Buy-Stops, say to cover a Short. As most are filled at the ask (or above), unless you are simply posting a willingness to buy, then I don't understand the logic of:
    IB will elect Buy-Stop orders only after we see a bid at the stop price.
    Again, why would the execution of a buy-stop be based on the bid when it will probably be filled at the offer???

    Both operations are a complete reversal to me, so could someone in the know please explain the (twisted) logic to this? I've never seen an order-execution platform that operates this way (I know, I know, that's part of the charm of IB...)
     
  10. ddefina

    ddefina

    It seems when a buy stop is executed when the Bid trades through your stop, you will always be filled higher than your stop (at the Ask). I would rather be filled at the Ask when "it's" at my stop? I don't understand the logic either. I know I could adjust for the spread on each stop and accomplish the same end, but who knows what the spread will be for sure at a given time of day?
     
    #10     Sep 19, 2001