Sunday, December 06, 2015

stop orders stopped?

The New York Stock Exchange [NYSE] announced in mid-November the decision to eliminate stop orders and “good-till-canceled” orders from the investor playbook. When used correctly, stop-loss orders can be a resourceful tool to curb losses, and they can also be used to prevent a stock from falling back to its cost basis – which theoretically ensures you make a profit.

The key word here is ‘theoretically.’ What the NYSE ultimately found was that stop orders were only being minimally used (3% of all orders) and they were also being used incorrectly more often than not. This has created unintended losses for investors and, in some circumstances, triggered more broad-based selling. The NYSE had seen enough, so as of February 26, 2016, stop orders are off the table.

Why the Rule Change?

By definition, retail sales figures cover total sales from the previous month. As such, they don’t tell us what’s going to happen – they tell us what’s already happened. In that sense, retail sales are more of a coincident indicator than a leading one. It gives us insight about the current state of the economy but not where it’s headed.

The ‘straw-that-broke-the-camel’s-back’ came on August 24th, right in the midst of the global equity correction. Stocks were exhibiting high degrees of volatility for several days (not unusual), but on August 24th hundreds of securities posted unusual moves to the downside. Though not fully proven, studies since by the NYSE and other firms have shown that stop-loss orders most likely played a role in exacerbating those losses.

Additionally, many investors lost a lot more than they bargained for when they set their stop-loss price points. Here is an example of how stop-losses work and can go awry – if you own security ‘ABC’ at $30, set a stop-loss for $20 but ABC opens trading the next day at $10, you are going to end up selling for around $10 a share. It’s quite possible that you totally miss your $20 stop-loss price point because, once the stop price is reached or lower, your stop-order is converted into a market order – executed at whatever the available price is. In some cases, like August 24th, that can mean selling your stock for a significantly lower price than you intended.

The NYSE received several inquiries from retail investing firms concerning stop-loss orders and their impact on pricing and, after analyzing the matter, decided that they are so infrequently used – and so often misunderstood – that they are better off not existing at all.

-- Mitch Zacks

*** [but...]

The NYSE ending GTC orders – which typically expire in 90 days anyway – isn't a big deal because brokerages have their own in-house GTC orders investors can still employ.

And brokerages will still offer stop-loss orders. The only difference will be they'll get triggered in-house and then sent as a limit or market order to be executed.

Since investors can still place stop orders and GTC orders with brokerages, the NYSE saying it will no longer accept them doesn't appear to be earth-shattering.

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