SEC Requirements for Stop Orders

This is a discussion on SEC Requirements for Stop Orders within the Brokerages forums, part of the Commercial category; Anyone know if there are any legal obligations on the part of the broker to fill stop orders? The reason ...

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Old Dec 14, 2009, 12:04am   #1
Joined Nov 2008
SEC Requirements for Stop Orders

Anyone know if there are any legal obligations on the part of the broker to fill stop orders? The reason I ask is that the stop order is the only way I know of that protects a trader if the stock goes south. I recently had a stop order in place with IB since I had to step away from my system. When I returned, the last, bid and ask were all below my stop price but had not executed. I have taken this up with IB but was told that they will not reimburse the difference between my stop order and the price where I had to execute manually (sent them a screenshot of the stop order from their trading software). Now I understand that a firm will at times execute at a price below the stop level and can see how this is possible, but this stock had a spread of one cent and was trading at least five cents below my stop level for over ten minutes.

So my question again, if a broker does not fill a stop order, is the individual responsible for the loss or is there some SEC regulation which requires the broker to fill at a reasonable price?
ezreddy is offline   Reply With Quote
Old Dec 14, 2009, 10:33am   #2
Joined Mar 2009
Re: SEC Requirements for Stop Orders

Stops need to be triggered. THey are triggered by a TRADE, NOT by bid/ask.

This means:
* If the market jumps, you are out of luck. THis is particualrly oftne the case over market closes.
* When the market moved without trading, you are out of luck. This happens pretty often during off-times in mini-currency-futures.

Stop orders normally turn into MARKET orders when triggerd. They end up in the end of the queue, but then are executed at the best price available.

Depending on an analysis of the stock in question, you may or may not have a case for reimbursement. If the broker does not properly handle a confirmed order, they are liable. But one has to see the market and exact items to know what exactly happened.

I am sure IB has a compliance / complaints department you can get involved.
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Old Dec 15, 2009, 7:43pm   #3
Joined Nov 2008
Re: SEC Requirements for Stop Orders

ezreddy started this thread
Quote:
Originally Posted by NetTecture View Post
Stops need to be triggered. THey are triggered by a TRADE, NOT by bid/ask.

Depending on an analysis of the stock in question, you may or may not have a case for reimbursement. If the broker does not properly handle a confirmed order, they are liable. But one has to see the market and exact items to know what exactly happened.

I am sure IB has a compliance / complaints department you can get involved.
I certainly understand that the trades are the trigger and in fact, this stop order should have been triggered. I have had stop orders trigger and my fill not at the stop level. I have no issues with this and understand that the stock can move below the trigger price. In this case, the stop should have been triggered and a trade executed. It did not happen. That is of concern to me if I have a broker that does not always honor my stop orders and also refuses any pecuniary liability for their failed system. I have attached a portion of their response below and am interested if anyone knows if the SEC has any requirements for a broker to fill a stop order.

From IB:

In your correspondence, you ask IB to provide an explanation of how the bad market data prevented your Stop order from triggering when the conditions of the order were met. In addition, you ask IB to forward instructions to escalate your complaint. Upon receipt of your correspondence, the IB Compliance Department further reviewed the facts and circumstances surrounding your complaint and provides the following response.

On December 3, 2009, LAVA was disseminating bad market data and crossing markets. IB wishes to remind you that IB must simulate Stop orders for listed stock.

Please note the Simulated Order disclosure posted on the IB Website, "IB simulates certain order types (for example, stop or conditional orders) where an exchange or other market center does not natively support such order type. While simulated orders offer substantial control opportunities, they may be subject to problems relating to performance of third parties outside of IB control, such as market data providers and exchanges.

Although we attempt to filter external data to ensure the best possible execution quality, IB cannot anticipate all of the reasons that a simulated order may not receive an execution, or may receive an erroneous execution. Unsatisfactory (non) executions may result from events, including [i] erroneous, missing or inconsistent market data; [ii] IB data filters (example: we may ignore last sale data that is reported outside the prevailing bid-ask as it often represents untimely or erroneous transactions; this may impact triggering of simulated orders); [iii] transactions subsequently deemed erroneous by an exchange; [iv] market halts and interruptions."

End quote from IB

My main concern is that a stop is the main way I can ensure that I do not suffer a major loss if I am away from my system and a stock starts to decline in value (or vice versa). What else can a simple trader like myself do if a stop is not honored, a loss in value occurs and the broker says they are not responsible?
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Old Dec 31, 2009, 2:55am   #4
 
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Joined Dec 2009
Re: SEC Requirements for Stop Orders

ezreddy:
I would like to help.

Couple of questions.

Were you trading in the US market, or was it international?

What kind of stops were you using when you entered the order with IB? Std stop or other kinds of stops, eg. trailing, oca, mark price, etc..,

Also what stock were you trading to experience this issue?

Lastly what routing did you use? Smart or direct?

Any smart ECN exceptions in your setting?

Assuming US market:
The reason i ask, is bcos' these variables do affect the stop execution. Certain stop orders of certain stocks (eg. listed) using various routing techniques, will affect the stop execution.

There are some exchanges that will not accept certain stop order types and some ECNs will not accept certain stocks to be executed with stop orders.

This is pretty standard across many DMA brokerages, I have come across.




Quote:
Originally Posted by ezreddy View Post
I certainly understand that the trades are the trigger and in fact, this stop order should have been triggered. I have had stop orders trigger and my fill not at the stop level. I have no issues with this and understand that the stock can move below the trigger price. In this case, the stop should have been triggered and a trade executed. It did not happen. That is of concern to me if I have a broker that does not always honor my stop orders and also refuses any pecuniary liability for their failed system. I have attached a portion of their response below and am interested if anyone knows if the SEC has any requirements for a broker to fill a stop order.

From IB:

In your correspondence, you ask IB to provide an explanation of how the bad market data prevented your Stop order from triggering when the conditions of the order were met. In addition, you ask IB to forward instructions to escalate your complaint. Upon receipt of your correspondence, the IB Compliance Department further reviewed the facts and circumstances surrounding your complaint and provides the following response.

On December 3, 2009, LAVA was disseminating bad market data and crossing markets. IB wishes to remind you that IB must simulate Stop orders for listed stock.

Please note the Simulated Order disclosure posted on the IB Website, "IB simulates certain order types (for example, stop or conditional orders) where an exchange or other market center does not natively support such order type. While simulated orders offer substantial control opportunities, they may be subject to problems relating to performance of third parties outside of IB control, such as market data providers and exchanges.

Although we attempt to filter external data to ensure the best possible execution quality, IB cannot anticipate all of the reasons that a simulated order may not receive an execution, or may receive an erroneous execution. Unsatisfactory (non) executions may result from events, including [i] erroneous, missing or inconsistent market data; [ii] IB data filters (example: we may ignore last sale data that is reported outside the prevailing bid-ask as it often represents untimely or erroneous transactions; this may impact triggering of simulated orders); [iii] transactions subsequently deemed erroneous by an exchange; [iv] market halts and interruptions."

End quote from IB

My main concern is that a stop is the main way I can ensure that I do not suffer a major loss if I am away from my system and a stock starts to decline in value (or vice versa). What else can a simple trader like myself do if a stop is not honored, a loss in value occurs and the broker says they are not responsible?
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