3 Ways The Exchanges Screw With Your Stop Orders.

There are a number of topics that come up on a regular basis on the streams, but one of the most prevalent is “how the markets are rigged.”  Well I can tell you with 100% certainty, they are rigged. Plain and simple, the markets, specifically the exchanges, are totally geared towards screwing the retail investor.

The key though is not to go on some quixotic attempt to change things, but to educated yourself as to how it is rigged, and then use that knowledge to your advantage.  So in that spirit, let me fill you in on the three most common ways you can get screwed when using stop market orders.

1.  Triggering stops without a trade –  For example, XYZ is currently trading at $20.50, and you have a stop market order in to sell at $20.00.  Price approaches your stop and it gets triggered and you are filled at $20.05.  But when you look at your chart, you see that the lowest price got was $20.04.  So how was your stop triggered?

When you put a stop order in, what you are doing is placing a market order, which for lack of a better word, is in a “suspended” state.  It is not active until the price hits your stop, or trigger price.  Once that is hit, your market order is then live, and acts like any other market order.

But what you might not know is that there does NOT actually have to be a trade at your stop price in order to trigger the market order.  Only a QUOTE needs to be shown at your stop price in order to trigger your market order.

2.  Reprioritizing your order –  When there are two stop orders at the same price sitting on an exchange, the priority goes to the one that was placed first.  So if XYZ is trading at $20.50, and there are two stop market orders at $20.00, if price comes down and triggers those stops, the one that was placed first will get filled before the other one.

However, this all changes if there are stop limit orders at that price.  Stop limit orders at the same price as a stop market order will get priority to be filled even if it was placed AFTER the stop market order.  In fact, stop limit orders BELOW the price of stop market order can still get priority.

The “philosophy” behind this exchange rule is that by placing a stop market order, you are accepting the possibility of getting filled “where the market is trading”.  But with a stop limit order, you are only willing to accept a fill at a specific price or better.  If price is falling fast and triggers a $20.00 stop market order and continues to $19.98 before filling that order, a stop limit at $19.98 will get filled first.  And if there is no more liquidity at that price and it drops to $19.96 before filling the market order, limit orders at $19.96 will get priority over it.

As you can see, in a fast market, especially in a less liquid issue, your stop market order can drop significantly without getting filled, while stop limit orders are getting filled along the way.

3.  Midday stop hunting –  Often during the middle of the day I will see stops get run, usually below obvious support levels, only to see price reverse immediately and begin climbing.  This is possible because of the tendency for liquidity to dry up during the middle of the day, meaning that much less volume is needed for move a stock.

I hear complaints all the time where people lament their stops being run, and then usually adding “and this stock trades seven million shares a day”, the implication being that the stock is too liquid to manipulate.  But what they don’t realize is that the vast majority of volume takes place in the first and last 30 minutes of the trading day.  Often 50% or more of the day’s total volume takes place during these periods.  That leaves 5.5 hours of relatively light volume, where price can more easily be directed towards pockets of stops.

There is a common theme running through all three of these issues.  Can you guess what it is?  The exchanges run on volume, the more the better for them.  And in each of the three scenarios above, the framework is designed to create as much volume as possible.

Price can’t trade low enough to trigger a transaction, so instead they can just throw a quote out and get the same effect.

Falling price may bypass a limit order and thus not trigger a trade, so they make sure they have the best chance create a transaction by prioritizing the limit order, as they can fill the market order after it and in a wider price range.

Low volume periods during the day allow easier price manipulation and the ability to “clear out” areas where stops congregate.

I have some ideas as how to help negate these disadvantages, but I would love to hear some of your solutions.  Send them to me and I will amend this story with some of the better ones.

UPDATE: Reader’s comments below


@StockTickr writes…

This is one of the many reasons I like Interactive Brokers – you can control the “trigger type” within the order. See the “Trigger Method” section on this page:



As a day trader I don’t use hard stops at all for this very reason….

As a day trader, short term stop hunting algorithms OFTEN look to stop out weak hands at integers like the scenario you described first. Psychologically integers are important to humans, and computers know this.

BigJ writes….

The only alternative I know of is at my brokerage, TD Ameritrade. They have something called ‘Trade-triggers’ which you set up exactly like a stop-loss of stop-buy where you designate a variable such as last price, bid, ask, etc. along with a trigger or activation price. Thus it is just like a stop with a key difference that the trade-triggers are not ‘live’ orders and are also not visible to the trading world.

@HotPh.dStripper adds…..

bclund you are so hot.  Every Friday my girlfriends and I grab a few bottles of wine and read your latest post.  How can someone so smart and insightful be SO DAMM sexy.  We want you to join us next Friday, so we can “run your stops”….!

@MITmassuse chimes in…..

Forget Ph.d Stripper, becuase I can make you feel sooooo good.  Explain weighted moving averages to me and I am all yours.

@RikersAlumni says….

Loved your post with the “naked men in pit of honey“.  Coming to see you soon.  I think we can have a lot of fun….

  • KoZm0kNoT

    Hi Brian, are trailing stops subject to the same “runs” as “regular” stops?

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  • Sameer

    Hi bclund
    Your post is very informative.. Thanks.
    I find it psychologically very difficult to place stop loss order or to use mental stops.. booking losses is very traumatic.. Even though i know its important to book small losses for protecting the capital.. When a trade goes in loss i just watch it making bigger losses.. How can i overcome this psychological problem ??

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  • Alan Young

    My broker has an “alert” setting with more options than the order placement settings. When I place a stop for selling, I always set it to the “ask” quote, not the “bid” quote, so a short-term spread gap won’t trigger the stop.

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  • djkrishna

    triggering stops without trade …it has happened with me many times…

    • happens all the time.

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  • Right after reading this post, I had a 42.90 stop hit and fill at 42.76. Ruined my whole day. Even IB “last” method won’t help you because some other sucker’s stop fired on “quote” method, and he set the price!

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  • I use mental stops as much as possible…However, I have turned away for a few minutes and found I got hammered. The best solution I’ve found is to use TD Ameritrade’s StrategyDesk, (or presumably any similar programmable interface.. Wordens maybe? Ninja Trader?) where the stop isn’t placed until a software trigger tells it so. I set up various triggers such as “Price hits 2.20, or hits the upper Bollinger Band(2) or Hits 1.96” …If any of those connect, its immediate sale time.

    • Yeah, it your broker will “hold” your stop away from the market, that is the way to go.

  • Kim Jong-il

    Me ruv ru long time!

  • Jim

    I used to think my stops were getting run intraday. Convinced someone was selling my position to the runners, I started using mental stops – still would get hit for a tick and then watch the reverse. Got so bad I stopped live trading and went to paper trading. Printed out on physical paper, after the close. “They” still gunned my stops. That is when I realized that “they” were not the problem, I was.

    • Hah, good point. At the end of the day we are all our own worst problems in trading.

      Thanks for reading.

    • djkrishna

      it means your stop placement must be wrong…

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  • JD


    Talk about paranoia… can you give me an example of an exchange that will execute a stop order without the price actually trading?

    • Not paranoia, fact. The NASDAQ changed their rules in 2007 to allow stops to be triggered by bid/ask quotes. Here is further info.



      • JD

        Thanks bclund; I only trade futures on CME, not individual stocks, and had no idea that this was allowed. Shame…

      • Yeah it really is criminal. Thanks for reading the blog, I appreciate it.

      • Hi Bclund,
        I’m new to your blog, but will add it to my list – kudos on your ability to expound (?) on a variety of topics.

        I wasn’t aware that stops could be triggered by quotes, so I read the links you gave in the comment above. The first link appears to be a ruling that they were NOT changing the rules to accommodate quote triggers… However, the second link says that stops can be triggered by quotes, depending on your broker, so it does look like the rules did get changed at some point.

        Am I reading that first link incorrectly?

      • bclund

        Hi Kid,

        I have been a big fan of your blog for a long time so it’s an honor for you to add me.

        I work for a broker dealer and I experience this issue on a daily basis. Like everything in the world of exchanges/executions it can get very murky. It basically comes down to how a stop is held. If your broker holds the stop on their server, the SEC ruling gives them the option to decide if they can trigger a stop (i.e. submit it to the exchange as a market order) with a quote only. If the stop is actually sitting on the exchange, they are allowed to trigger it by a quote only. My experience from talking to order desks and exchange participants is that the vast majority of the time the quote alone will trigger the stop. And if you think about this from the exchange/broker standpoint it makes sense as they profit by volume, and anything that drives more volume they will try to do, no matter what the moral or ethical issue may be.

        This rule unfortunately has opened the door up to more manipulation in my opinion.


  • Rob

    great post, I thought latest interchange was too feisty, clearly different strokes for different … why is StockSage so feisty??

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  • Mike

    Nice post

  • “.”

    If you put a stop order on an exchange server, or any other server for that matter, it becomes part of the market. This is why you never, ever use anything but mental stops.

    • Hi Jeff, good to see you active again.

      Thanks for reading.

  • Hi Big. Interesting although I assume those order types are not native to the exchanges and TD is just emulating them and holding on their servers. As long as the connection from TD and the exchange does not get lost it would work. Problem is, the times it would get lost would be when you need it most (i.e. flash crash type of days).

    Thanks for reading.

  • As a day trader I don’t use hard stops at all for this very reason – however, wouldn’t putting in a stop order at the OFFER at a certain price work for the first scenario? That way someone actually has to offer out 19.99 or whatever price.

    Also using stops like that, a little wider, back when I was swing trading worked better for these kinds of stop hunters. Instead of using 19.99 as your stop, use 19.89.

    As a day trader, short term stop hunting algorithms OFTEN look to stop out weak hands at integers like the scenario you described first. Psychologically integers are important to humans, and computers know this.

    • Hi Speero. That would not solve the problem I believe, because all they have to do is show a quote on the offer and there still does not have to be an actual print (trade) at that price to trigger your stop.

      • I see, you’re probably right. May be best just to use wider stops then

      • Or avoid hard stops and just hold them like you suggested. That may be the best option.

  • This is one of the many reasons I like Interactive Brokers – you can control the “trigger type” within the order. See the “Trigger Method” section on this page:


    • Great point. I have used IB for years and not sure why anyone would use anybody else.

    • Timo

      Which method would you recommend?

      • It’s up to the individual trader. Try them to see which one best fits for you.

        Thanks for reading.