Stop loss order during a precipitous decline.

June 18th, 2017, 11:29 AM

I recently got into a discussion with a friend about how a stop loss order would be handled during a precipitous market decline. Let's say you purchased 1 ES contract and set your stop 8 ticks below entry. And all of a sudden a large earthquake strikes the north jersey area. Given the fact that most of the stock exchanges are now located in north jersey, this causes a major decline in the indexes. Now I know the odds of a major earthquake hitting north jersey are very slim, but I do remember one summer in the late 80s feeling a tremor while visiting family in Long Beach Island. Anyway the question is, would your 8 tick stop order be triggered or would the move down be so violent that the lack of liquidity would cause you to incur a much larger loss?

Free markets were created with the intention of expanding the economy, not to give it to a select few.

June 27th, 2017, 12:28 AM

Well I would say something sarcastic but maybe you are serious. Do you think one of the most active and sophisticated electronic trading hubs in the world has people who are paid to worry about stuff like that? And if that plan fails they just turn everything off. Remember when the big houses kept breaking the market in specific stocks with bad code the exchange would just nullify all the trades.

If you want to see what a real disaster looks like go look at the charts from election night when they triggered the trading collar.

June 27th, 2017, 01:37 AM

The Stop order type is an order which, when accepted, does not immediately go on the book, but must be "triggered" by a trade in the market the price level submitted with the order. There are two types of Stop order: the Stop-Limit, which goes on the book as a Limit order when activated, and the Stop with Protection, which goes on the book as a Market order.

Stop Order with Protection
Stop orders with protection prevent stop orders from being executed at extreme prices. A stop order with protection is activated when the market trades at or through the stop trigger price and can only be executed within the protection range limit. The order enters the order book as a market order with the protection price limit equal to the trigger price plus or minus the pre-defined protection point range. Protection point values usually equal half of the Non-reviewable range. Refer to https://www.cmegroup.com for a list of the Non-reviewable range per product. For bid orders, protection points are added to the trigger price to calculate the protection price limit. For offer orders, protection points are subtracted from the trigger price.
CME Globex matches the order at all price levels between the trigger price and the protection price limits. If the order is not completely executed, the remaining quantity is then placed in the order book at the protection price limit.

https://www.cmegroup.com/confluence/display/EPICSANDBOX/Order+Types+for+Futures+and+Options#OrderTypesforFuturesandOptions-StopOrder-FuturesOnly

June 27th, 2017, 02:02 AM

Stops are not guaranteed and you can incur a much larger loss than you anticipate.

Stop loss order during a precipitous decline.

Discussion in Emini and Emicro Index

Stop loss order during a precipitous decline.