Dear Retail Investor: Here's How Your Stop Orders Really Work

Tyler Durden's picture




 

As described by Nanex LLC's Eric Scott Hunsader,

Retail stop orders await execution, typically at common price intervals (0.00, 0.25, 0.50) at the Wholesaler. Wholesalers know those price levels and can anticipate and exacerbate the downside movement to increase net profits.

How?

Wholesalers create a composite view of the Order Book (Bid/Offer at each Price Level) across all exchanges.

 

When the Wholesaler recognizes that the book pressure on the Offer side is much larger than available Bids, a clear sign that the stock is about to decline, the Wholesaler can react by adding more Short Sales to the Offer, further ensuring the Retail stop order limits gets pierced.

 

The retail stop orders then get triggered as the stock prices drops from the heavy Offer side pressure and few marketable bids.

 

After the rapid price dislocation, the composite view of all Exchange order books begins to balance out as Marketable Bids come into the market and offset the Offers.

 

The Wholesaler and HFTs then cover their short-sales, buying from Retail investors near the temporary low, just prior to the stock recovery.

 

The stock reverts, flash crash over.

And there you have it - instant profits and massive gains for wholesalers; even faster, high-frequency losses for retail traders. So easy, in fact, that a vacuum tube collocated next to NYSE's laser can do it.... about 1 million times per second.

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Tue, 01/05/2016 - 16:54 | 7001759 Max Damage
Max Damage's picture

NY Fed traders handbook chapter 1

Tue, 01/05/2016 - 17:06 | 7001811 ParkAveFlasher
ParkAveFlasher's picture

"The bucket shop" is now very large, "the wire" is now very small, and "the operator" is now made of silicon, but "the game" doesn't change. 

Tue, 01/05/2016 - 17:37 | 7001910 NoDebt
NoDebt's picture

This is why it's always best to buy and hold.

(Do I need to use /sarc tag for the first time ever here??)

Tue, 01/05/2016 - 18:02 | 7002011 g speed
g speed's picture

why be a buy and holder when you can be a trend follower and use stop loss stops, ---- think chinese house wife---

rule 1---always invest in the lowest price lowest value stocks---(penny stocks) -the profit possabilities are gigantic-

rule 2 ---always double down on losses ( cost averaging) --that way you will eventually get your money back

rule 3 ----find a stock market guru who you believe in and follow his/her advice religiously 

rule 4 ----invest 100% of your retirement (401K) in the market--that way you can get returns on 100% of capital and get rich quicker

rule 7---read the Wall Street Journal everyday

rule 8 ----join a investment club and invest as a group

rule 9---- get a feeling for a particular stock and buy it and hold it no matter what

rule 10---If you think a stock looks good buy it right away--(you may miss out) if you think a stock looks bad sell it right away (why lose sleep)

  just want to be sure you newbees out there have a handle on the market ---good luck ---

Tue, 01/05/2016 - 18:17 | 7002054 ghengis86
ghengis86's picture

Dad, is that you? Oh wait, can't be. Unless you're typing from a public library computer or found a way to use someone's unsecured wifi because you're too broke to afford internet at your trailer.

ETA

This is seriously the playbook I heard regurgitated to me from my elders in the 90's and early again in the 2000's. That's how you get rich! Lol. Rinse. Repeat.

Tue, 01/05/2016 - 18:18 | 7002065 Richard Chesler
Richard Chesler's picture

Whatever you do, keep this sheeple principle in mind,

It's not a loss if you don't sell.

Tue, 01/05/2016 - 18:34 | 7002122 Four chan
Four chan's picture

maybe we should end the pretence and simple book trades with the hft's and let them tell us if we won or lost. how are they still allowed to steal? obama?

Tue, 01/05/2016 - 18:41 | 7002150 swmnguy
swmnguy's picture

"g speed":  Don't forget they're not making any more real estate.  So it's really not possible to borrow too much to buy a house.  If you're approved, you can afford it, or the lender wouldn't have approved it, would they have.

Oh, am I on the wrong thread?  Sorry...

Tue, 01/05/2016 - 19:36 | 7002383 Parrotile
Parrotile's picture

Also remember that, because of "Climate Change" and those "rapidly rising sea levels", there will be even less Real Estate in the future, so you MUST buy now or you will be out of the market forever!

Alternatively, a good time to buy in desert locations - so you'll be planning for your future "waterfront property" when they flood . . . . . . . . .

:-)  :-)  :-)

Wed, 01/06/2016 - 09:55 | 7004455 Turdy Brown
Turdy Brown's picture

rule 11---Follow Denis Gartman's (a genius, btw) advice to a tee!

Wed, 01/06/2016 - 04:37 | 7003619 zvzzt
zvzzt's picture

True with the exception that the most obscene things of all is the emergence of new order types, availble only to HFT / big paying companies. In the old days there was at least som sort of risk involved for the stop-hunters and/or stock pushers ("so you want to push the market buddy... well, meet my endless ice berg order...."). 

Nowadays the "limit buy-cross market, but only if the offer is taken out first, so I am ahead of everyone else"-order is to insane to even think about it. WTF?!

Anyway, out of trading after almost 20 years. Running a cafe nowadays - 95% less income, but a lot more happyness!

Tue, 01/05/2016 - 17:06 | 7001812 Stuck on Zero
Stuck on Zero's picture

ETrade is absolutely the worst at screwing their clients. They'll perform an internal trade at 75% off the NYSE price to trip stop losses and then pick up a pile of shares at a big discount.

Tue, 01/05/2016 - 17:38 | 7001919 Peak Finance
Peak Finance's picture

God there aew far, far worse shops out there.

Like Generic Trade for instance. 

Tue, 01/05/2016 - 18:17 | 7002043 The Saint
The Saint's picture

Brought to you by the United States Securities and Exchange Commission - Bringing Fairness and Honesty To All Markets.

/s

Tue, 01/05/2016 - 16:54 | 7001762 booboo
booboo's picture

Sucker born every nanosecond

Tue, 01/05/2016 - 20:18 | 7002522 optimator
optimator's picture

5000 Free Trades?  What nice folks to do that for me if I trade with them.

Tue, 01/05/2016 - 16:56 | 7001772 alexcojones
alexcojones's picture

When you finally realize that it ALL rigged here in 'Murica,

you relieve a lot of stress while you prep

Tue, 01/05/2016 - 17:12 | 7001829 WhackoWarner
WhackoWarner's picture

Maybe you relieve stress but it ups the anger that comes with knowledge of fraud.  And that is justifiable disgust as wallets get pick-pocketed and hard working people get fleeced and fleeced again and again.  What really chokes me is that the bankers/investment riggers SMILE and claim to be "doing God"s will" during this feeding frenzy.

 

I think I said it 5 years ago here.  TPTB will not be satisfied until the trillions in retirement funds that people worked for are stolen.  And it has progressed.  And now approaching the end few rinse and repeats.  "How dare these people have money?....it is mine all mine all mine,,,my precious.  AND my precious is the target."

 

$$$$ will not be satisfied until the unwashed masses are back in serfdom; in company towns.  Slavery was not cost effective as the owner needed to provide some basic welfare.  Serfdom is the goal.  Slaves with debts.

Tue, 01/05/2016 - 17:40 | 7001932 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

Swearing can help relieve the anger:

http://www.scientificamerican.com/article/why-do-we-swear/

 

Tue, 01/05/2016 - 17:52 | 7001976 WhackoWarner
WhackoWarner's picture

Has not helped my social standing though.

Tue, 01/05/2016 - 18:02 | 7002012 manofthenorth
manofthenorth's picture

FUCK social standing.

It is no measure of health to be well adjusted to a profoundly sick society.

Tue, 01/05/2016 - 19:23 | 7002342 willwork4food
willwork4food's picture

Tell that to the nice Baptist members at our church.

Tue, 01/05/2016 - 18:09 | 7002036 WhackoWarner
WhackoWarner's picture

Some may call me radical.  However I object to that.  I abhor ignorant complacency and the absence of thinking.  If you have no curiousity for fact in this world; you are a "collateral damage victim" of this unlawful power machine that will rape far worse damage than Swedish blondes.

 

I abhor violence.  But put it in my path and I will build a moat.  Enough is enouigh.  It is a matter of fact that there is criminal behavior,  It is demonstrated that it is pre-meditated,  It is fact that there is a "bought-off" regulatory, captured system. It is fact that crooks are fleecing every working person and being protected by a political system that is bribed to the hilt.

 

So quit excusing it.  Or making light of it.  USA USA USA is the a tentacle of this.  The root?  Think not.  USA are puppets.  Old and older greed way older greed that has learned how to hide. 

Tue, 01/05/2016 - 16:57 | 7001780 seek
seek's picture

This has been going on forever. My stock investing days largely came to a close back in the early 90s when Schwab pulled this same shit internally on my trades.

Tue, 01/05/2016 - 18:18 | 7002063 Doubleguns
Doubleguns's picture

Yep its a very old gig but the new dogs are getting tossed off the porch and they have just figured it out so new complaint for same old trick.

 

Just goes to show ya that you can teach new dogs old tricks. 

Tue, 01/05/2016 - 23:42 | 7003256 mkkby
mkkby's picture

The discount brokers were always selling your trades to a wholesaler.  How do you think they were able to offer such cheap trades?

I used some of the early direct access brokers, but by 2000 I could see "someone" was able to front run my orders.  Then I found out the exchanges were selling invisible orders and sub penny increments -- to preferred customers, of course.  Someone could out bid you by a fraction of a cent, and your order just sits there.

Didn't lose anything.  My money management was super tight.  But it was time to get out for good.

Tue, 01/05/2016 - 17:00 | 7001786 upWising
upWising's picture

"We're in the midst of the disillusionment and heartbreak season....

KEEP WORKING.....
DRINK more alcohol....
WATCH and BELIEVE your television.....
GIVE GENEROUSLY to your TeeVee Preacher.....

BUT MOST IMPORTANTLY, have Faith and Confidence in the SYSTEM!

(1 minute with the Firesign Theatre)

https://www.youtube.com/watch?v=VDqk8o6y13Y

Tue, 01/05/2016 - 17:01 | 7001790 conraddobler
conraddobler's picture

Solutions?

Pee in a bottle and never leave the computer during trading hours.

Tue, 01/05/2016 - 17:38 | 7001918 WhackoWarner
WhackoWarner's picture

Frig that noise.  GET out of the system.  Period.

Take control of you dimes and nickels.  No counter party risk means no tampering.

I personally am divorcing myself wtih a great vengeance from BIG banks.  I ain't got much but it is mine.  Thing is that USA USA USA has already reduced so much of their workers into poverty that people have not one dime to spare.

Trapped.  Slaves needed "owners" to provide food and shelter.   Serfs paid fees and had to feed themselves.

 

Good thing I live way far far far away from this garbage.

Tue, 01/05/2016 - 17:02 | 7001797 OutaTime43
OutaTime43's picture

I never use stop orders.. ever.

Tue, 01/05/2016 - 17:18 | 7001844 antonina2
antonina2's picture

Yeah same here, I use profit target orders, but no stop loss orders, guess that's the beauty of being able to trade on your smart phone, when needed!

Tue, 01/05/2016 - 21:05 | 7002730 thesonandheir
thesonandheir's picture

Everyone has a stop loss.

 

 

Just because you don't set one arbitrarily doesn't  mean you don't have one.

Tue, 01/05/2016 - 23:57 | 7003290 mkkby
mkkby's picture

If you don't have a stop loss, then your account is blown out already and you don't even know it.

The key to winning is learning to take small losses or break evens in stride.  When you can do that, the good trades will come.

When I was trading, I entered my entry and exit at the same time.  So the instant the trade went against me, I could dump it immediately at the press of a button.  I took pride in break evens, because it meant I didn't let a loser get costly.  On the other hand, when a trade went favorably I just updated the exit order with higher and higher profit targets.

Plus, a stop loss let's you leave the computer and go do other things.  It gets pretty boring or stressful watching a ticker 6 hours at a time.

Tue, 01/05/2016 - 17:22 | 7001859 MaxMax
MaxMax's picture

The market is way smarter than just looking at your stops.  Even without stops, they have computers analyzing your particular trading patterns.  Add in front running, HFT, insider trading, FED mispricing the value of money and everything else, it makes it pretty hard to invest with any degree of confidence.

Tue, 01/05/2016 - 17:44 | 7001946 NumberNone
NumberNone's picture

Today tried to dump 5k shares at ask on one the highest volume stocks and did not get a single sale. The stock instantly bounces 2 cents up. Not a single authentic bid in the 50k bids on my screen. The market is mostly computers circle jerking each other all day just waiting on new money to get within their reach to steal.

Tue, 01/05/2016 - 21:46 | 7002867 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

What kind of stocks were they? Like big name stuff or mid caps?? 

 

 

Wed, 01/06/2016 - 00:07 | 7003311 mkkby
mkkby's picture

That is because your broker network is too slow.  You are in line after everyone who came first at the same price level.  The HFTs can see your order and have enough time to lift their bid away.

If you want fast execution, you have to pay up.  The nice thing about penny increments is your cost is minimized.  Offer 1 cent below market and it should get you out fast.  Use a limit order or you could get smacked for a lot more.

Tue, 01/05/2016 - 17:02 | 7001799 absente reo
absente reo's picture

Bastards.

 

Tue, 01/05/2016 - 17:04 | 7001805 What is The Hedge
What is The Hedge's picture

Say hello to Blackberry shares as they traded today!!!!

Tue, 01/05/2016 - 17:08 | 7001820 Fuku Ben
Fuku Ben's picture

The grifters are running out of slow burn methods to rob retail investors.

Next up comes The Sting and the big score.

Tue, 01/05/2016 - 17:19 | 7001846 WhackoWarner
WhackoWarner's picture

Come on.  It has been a continual fleecing.  The big Sting likely will take down retirement, bank accounts, bonds, currencies by 75% or more.  With no legal recourse.  Ain't you glad you did not pay attention for the last decade/2 decades/3decades   as these laws were dismantled and rights evaporated.

 

Not much fun now.  Nowhere to hide? 

Tue, 01/05/2016 - 17:08 | 7001821 JDFX
JDFX's picture

Stops are for buses !  

Tue, 01/05/2016 - 17:27 | 7001874 RopeADope
RopeADope's picture

Always assume that your brokers, custodians and data storage vendors are whoring out information on your positions.

If you wish to be truly ruthless, you use this criminal behavior against them and profit from their erroneous assumption that they are an apex predator.

Tue, 01/05/2016 - 17:50 | 7001969 paint it red ca...
paint it red call it hell's picture

You are correct, their footprints can be recognized and traded against, if, IF emotions are suppressed and indicators respected.

Tue, 01/05/2016 - 17:27 | 7001877 Imagery
Imagery's picture

I'm truly sick and tired of Panzi-Assed 'Muricans complaining of a Rigged Stock Mkt.  Hell, where the fuck have you been for the last 20 years?  They are all rigged by the Fed and TBTF WS with the SEC and USG complilcity - in exchange for 7-figure salaries upon retiring to private sector banking of course.

Stop Complaining and Get outta the Markets.  ALL OF THEM.  And teh Banks too.  Till then, you're all just a bunch of Panzi-Ass Complaining Hypocrits.

Tue, 01/05/2016 - 17:32 | 7001890 jakesdad
jakesdad's picture

have I used the phrase "low-latency frontrunning" in the last few hours?

Tue, 01/05/2016 - 17:35 | 7001898 marts321
marts321's picture

Same in Forex, where the 10 biggest institutions make up something like 90% of volume.. Liquidity gotta come from somewhere, bitchez

Tue, 01/05/2016 - 18:38 | 7002136 lasvegaspersona
lasvegaspersona's picture

Douche Bank used to have a US FOREX outfit. They would do ridiculous things just to get down to my measly order.

Nothing is too small for them to steal!

Tue, 01/05/2016 - 17:41 | 7001914 paint it red ca...
paint it red call it hell's picture

I learned the hard way, never use them.

I've had the market for an equity walked down in seconds to take out a freshly entered 10,000 share trailing stop (well off the bid) then immediately resume its move up into closing high on the day, week and month.

That was years before HFT was known to be common practice.

Wed, 01/06/2016 - 00:17 | 7003346 mkkby
mkkby's picture

They can be out smarted.  Stay away from even dollars, 10 and 5 cent increments.

If a security trades at say 10.07, there is a lot of supporting bids at 10.00, more at 9.95 and more at 9.90 and 9.85;  if you set your stop at 9.83 it's pretty likely to be a "real" down market by then.

I never buy something trading at 9.9x for the same reason.  There are tons of sell orders around the even dollar amount.  There has to be very strong buying pressure to pierce thru all that.

Good luck in your trading.

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