Online trading question [something fishy?]

Factual Questions
1

When I put a “stop loss” sell order with, say, Etrade, does anyone (besides Etrade’s computer system) know that I have just done that?

I assume that when I put a “stop loss” sell order for, say, 41.00, and if the stock is currently trading at 43.00, then no one (traders, market makers, etc) can see that I have done so; the information sits only within Etrade’s computers.

Only if the stock goes down to 41.00 will the stop loss order be submitted as a sell order, at which point it will become visible to traders, market makers, etc.

Is this correct? Or is it the case that the moment I submit a stop loss sell order, someone at Etrade or elsewhere can see what I’ve done?

I’m asking this because on two occasions something possibly fishy has happened.
I submitted a stop loss order because I had to leave the computer for a while.
After returning, I noticed that the price had quickly taken a dive towards my stop loss price, triggered the sale, and then quickly ascended back to its original price.

In fact, if you look at the intra-day graph of the stock price, it forms a nice sharp V around my stop loss price, with the tip of the V being exactly where my stop loss price is.

This has happened twice, with the two occasions being months apart.

Is it just coincidence? Twice?

Or is someone looking at the stop loss orders being submitted and somehow taking advantage of them? But how would one do that? I assume it’s hard to manipulate the motion of a stock price with large daily volume.

Can someone with a good knowledge of trading shed some light as to what is happening?

2

It sounds like tin foil hat time. I am sure that someone at E-Trade could see your stop order but why would they care. It is just in their system.

It sounds like you are saying that the entire market for the stock tanked because you put in a stop loss order. That simply isn’t going to happen. The stock has activity from many, many people at any one time. Unless you are doing some mega-trading, I don’t see why anyone would care.

Your trades are only going to affect the market for that stock in the tiniest way when the trade is done and none before it is done.

It is just a coincidence.

3

First - are you trading stocks that generally are pretty low volume? If you’re trading a blue chip stock, then it’s probably coincidence because nobody would be able to individually affec the stock price to take advantage of your stop order. If it’s a rarely/lightly traded stock it would certainly be conceivable.

4

Not a blue chip stock, but also not very light volume.

I also think it most likely was just coincidence, but the exact position of the V and the immediate bounce-back was quite shocking to me.

Anyway, until this happens 5 or 6 more times in a row then I will just treat it as a coincidence.

So who has the ability to do this with lightly traded stocks, and how might they do it? Can a trader do it, or only a market maker?

5

There’s nothing fishy about this and though there’s some level of paranoia that you should have, I think all you need to do is change your trading habits rather than look for malefeasance on etrade’s part.

Essentially what happened is known as “running the stops.” Basically, over their experience, a trader will learn where people are most likely to place their stop orders and that level, if hit, will trigger that stop, generating a sell which tells other buyers that they can get the trade for that lower price. If there are enough stops in a short area, there can be significant downside pressure and this will last until the stops have all been triggered and buyers, seeing this as an opportunity to get a better price on a given issue, will bring demand greater than supply, raising the price.

6

There are plenty of people who are able to do this although it’s not as common as it once was. Jesse Livermore essentially made a living driving up/down the price of a stock/commodity before taking massive positions on the other side, essentially moving the market as he wished.

7

In the stock market, anything imaginable can happen, and does, whether it be legal or not.

8

There are many markets between you and the “floor”. When you place an order it can be executed by your broker, an ECN, a regional market, or it may perhaps even make it to the actual exchange. There are probably a few more “inbetweeners” I have forgotten.

9

I have to agree with this. And as a former E*Trade employee…honestly, they don’t care about your one stop loss order. Mostly likely no human even saw it unless you spoke to a trader to place it.

10

You mean, I should stop using stop loss orders? Or just place them more intelligently? :slight_smile:

Thanks for the explanation. It matches what happened quite nicely.

I have one question though: how can the market know “if there are enough stops in a short area”? Even if there are a million stop loss orders for, say, 41.00 no one is supposed to know, right? This information is only inside the computer. Only when the stop loss price is hit does the order become “visible” to the market. Is this correct?

Or does “stop loss order for 41.00” become visible to the market the moment I hit submit, even while the stock is higher?

11

traders look at charts and round numbers. Placing a stop at $40 is a lot more obvious than placing the stop at $39.75. It just is. The chartists out there look at the round numbers as well.

I don’t know about the US, but in Hong Kong the stop loss only becomes visible to the market when it’s placed in the exchange system. The exchange system shows IIRC 5 price spreads on the bid or offer side and number of orders at each stop.

12

I believe your order goes to the “market” when you place it. Fidelity online trading has an option to NOT submit your stop-loss until it is within the market bid-ask.

13

Others have answered the other ones, but this one:

In theory, a stop says “My position is no longer worth holding when the price hits this level” so putting a stop in says you have no confidence in the market at that time. The stop is used to “act on your behalf” when you aren’t able to pay attention to the market.

Keep in mind that a stop getting hit and the price bouncing off of it is not necessarily indiciative of stop being run - just as you thought that price was too low for you to be in, someone else may think that that price makes a given issue a good buy and essentially supports the market with the shares you just sold.

So…if you can’t be at the screen to see what conditions are like when a given price is hit, that’s what stops are for. If you are a day trader, they’re superfluous.

At the end of the day though, you’ll have to consider them in context of your trading plan - they may be a tool that conflicts with it, or it may be a skill you need to work on.

Also consider that I’m not a qualified professional.