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Jerry,
At 09:18 PM 2/4/98 -0500, Greatelto@xxxxxxx wrote:
>Richard, I have to disagree with you. In essence, what you are saying above,
>is that regardless of where the stock is traded, PSE. Third Market, Instinet,
>Arizona Stock Exchange, etc., the stop loss order will be effective the
moment
>the stock trades at the stop loss price. Absolutely not!! The stop loss
>order is in effect only on the floor of the major or primary market. In the
>case of IOM, that is the NYSE only. If the stock is RFP, that is on the ASE
>only. To the best of my knowledge, there are still no stop loss orders
>permitted on NASDAQ. I have been away from the business for a few years now,
>so I could be wrong, but I have never heard of a firm holding the stop order
>on their computer waiting for the price to be touched. The firm's risk
>exposure would be out of sight....something they would not accept. And with
>commission charges what the are today (low), such action by a firm would not
>make sense on a risk/reward basis.
Well, we can at least agree to disagree! ;-) Except, I think, that we both
don't like stop orders.
First of all, let's leave call markets (like AZX & POSIT) out of the
discussion to keep this relatively simple. Not that I have anything against
call markets! It's just that their form makes discussion of stop orders a
bit convoluted. Similary for the ASE: stocks listed there are rarely listed
elsewhere. Let's also leave Instinet out of this, because different
brokerage firms deal with Instinet differently.
With respect to "Not Held" orders under normal market conditions:
Your brokerage firm is positively obligated to provide you and all of its
customers with best execution. That is, it has to do the best job it can
for you, given your instructions, at the time. If the firm leaves a stop on
an NYSE specialist's book that can otherwise trade elsewhere, such as the
PSE, or the Philly, to list two ITS participants, your brokerage firm is
not fulfilling its obligation to you.
As a result, the brokerage firm will most likely not place the order on the
NYSE specialist's book, but hold the order on its internal system, or
perhaps on the NYSE's BBSS system. When the stop price is
touched--someplace, not necessarily on the NYSE, the order flows to the
specialist book (perhaps on a different market through ITS) as a market
order. The firm's risk is practically nonexistent, because this takes place
in less than a second or two through SuperDOT, for example, needing no
human intervention. The brokerage firm pays the lowest commission rate to
the specialist (for market orders), retaining a greater fraction of the
commission it receives from you. Stop orders, if I recall correctly, carry
the highest specialist commission, even higher than limit orders not traded
within 90 seconds of placement.
Your broker may place a stop order on the specialist's book on an exchange
other than the NYSE. The trade will be executed through ITS at the
appropriate time. This often happens when the regional exchange's
specialist commission + the ITS routing fee is less than the NYSE
specialist's stop-order commission. Many regional brokerage firms negotiate
such arrangements. This can lead to the regional specialist cherry-picking
orders, but that's another story....
If you specify your order as "Held", the brokerage firm is required to
forward the order to the specialist of the exchange you specify, or the
primary exchange for the stock if you do not specify. Orders not specified
as "Held" are traded on a "Not Held" basis.
I can think of one agency broker which will execute stops on OTC stocks. I
cannot tell you which it is, however, or my employer will kill me.
>Once again, I contend that a stop loss on IOM is sent to the NYSE floor and
>the order held on the market maker's book (or computer). The stop order is
>only elected if the stock trades at the stated price on the NYSE. What you
>are saying may apply to regular buy and sell orders, but I don't think to
>stops.
Your brokerage firm *may* do this--I am certainly not saying this is
absolutely not the case. If I've given this impression, I apologize. But,
to my knowledge, many firms do *not* do this.
Cheers,
rld
Richard Leighton Dixon
rldixon@xxxxxxxx
Disclaimer: Nobody agrees with me.
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