stop order

What is a stop loss order?

A stop-loss order is a special order condition, previously only available on the New York Stock Exchange (NYSE), that allows specialists to delay the execution of an order in order to increase its price for a short period of time. They were banned in 2016.

key takeaways

  • Stop orders are allowed (until 2016) if specialists on the NYSE trading floor wish to block order execution because a better price may appear.
  • The main purpose of a stop-loss order is to limit price fluctuations caused by large or multiple orders.
  • Orders are stopped for a short period of time, but must be executed at the market price at the time of the stop or better before the end of the trading day.

Learn about stop orders

A stop-loss order is different from a stop-loss order, which is an order that triggers when the price of a stock crosses a certain point.

If a stock exchange member, known as an expert, thinks there will be a better price, he or she can stop or hold an NYSE market order. Experts act as Designated Market Makers (DMMs) to coordinate and oversee trades in specific stocks, posting and executing market orders as limit orders. If it helps them fill a larger order in their request deals list, they will.

This practice ceased as the role of the specialist evolved. Most trades are now electronic, and few specialists work on the trading floor of the NYSE.

A stopped order cannot be executed immediately by an expert, as the expert can execute the order at the discretion of the expert. In particular, experts can stop an order if they think they will get a better price if they stick with the order. The purpose is to limit price fluctuations caused by large orders or multiple orders.

According to the previous NYSE regulations, once the order is stopped, it will be recognized and the expert will be required to guarantee the current market price (if the expert fails to obtain a better price). Orders can be suspended for a period of time, but must be completed before the end of the trading day.

Experts stop orders for a variety of reasons, but they can only do so if the market price is also guaranteed when the order is stopped. For example, a market order comes in to buy 1,000 shares, quoted at $10.25, and offers 2,000 shares. Since the buy order can be filled immediately at $10.25, if the expert holds or stops executing the buy order, they must offer the buying client $10.25 or less.

Experts can modify the market buy order to a limit order (bid) to close the spread, or they can fill the buy order with their own shares that they have to sell, offering a better price than 10.25.

Experts may take such actions to prevent stock price volatility or to protect themselves. Experts need to actively participate in stocks and provide liquidity. They will try to avoid huge losses by buying and selling stocks to provide liquidity while limiting risk.

The NYSE trading floor no longer plays the expert role it once did. Electronic transactions gradually diminished the role of experts, and by 2008, the role of experts no longer existed. Field experts now play the role of Designated Market Makers (DMMs) and now help keep NYSE-listed stocks in order. Today, the vast majority of market maker transactions are automated.

stop order example

Suppose the expert shows a bid of $125.50 for 1,000 shares and a bid of $125.70 for 3,000 shares on the order book. A market order comes in to sell 500 shares. The order can be executed at $125.50, but the specialist will stop the order. They posted a sell order for 500 shares at $125.60, closing the spread.

That could draw some buyers into the stock, or it could drive prices down. In either case, since the specialist stopped the order, they would have to fill the sell order at $125.50 or higher, because if the sell order hadn’t been stopped, that’s where the sell order would have been filled.

Experts can also decide to fill orders from their own pool of stocks. For example, they could execute the order at $125.53, giving a sell order a slightly higher price than the current bid.

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