20 November, AtoZForex.com, Lagos – Apparently, the retail FX brokerage industry is not the only sector affected by stop loss executions beyond the clients’ price commands. The New York Stock Exchange has identified this order type as a problem, and consequently decided to eliminate it.
What are stop orders?
Stop orders which are a set of instructions intended to activate a certain trade action on a stock or currency or other financial assets at a certain price. An important part of stop orders which is often ignored is the fact that this stops can be activated at a price far worse than the one on the order. Due to this associated risk, the NYSE has now clarified that this order type will no longer be available starting on Feb. 26
The recent event of August 24, when markets experienced extreme share-price swings has been largely attributed to the effect of stop orders, as found by BlackRock in its research into the day’s event. BlackRock, the worlds largest fund manager explained:
“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.”
James Angel, a financial markets professor at Georgetown University described stop orders, comparing them to land mines. Adding that “they blow up in ways that are unanticipated by the people who plant them.”
“Good-till-canceled” order type
In the past six months, stop orders have only made up a tiny proportion of executions on the NYSE, with less than o.3 percent. As the NYSE to end stop order, it will also stop 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 primary aim of the exchange is to “to raise the profile of the risks associated with this order type.”
However, brokerage firms can still help clients carry out this service by programming their systems to execute market orders on the client’s behalf after a stock price reaches a specified threshold.
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