Stop getting taken out -
Someone had asked me about a week ago to answer a question on stops getting taken out. I meant to reply but was intending to do it from the office as it was about 9:45pm, well past my bedtime. Anyway, my apologies for missing...
Here's my view...I handle about 200 orders a day for a broad range of clients, insitutional, long term, active traders, etc. In my personal opinion, the use of stops is probably one of the most important elements of success. Infact, in my opinion, more than acute skills at pick stocks, timing stocks, executing traders (which I think most should leave to a trading oriented firm), stops is the most important element.
Most traders average 60, 70% winning traders, but the failure rate is high. Why? the keep the losers and sell winners. This is backwards. You cant run a business going for 1/2 point gains and getting hit with dollar losss. It just doesnt work. You need to keep losses tight and hard.
Particularly with OTC stocks where they edge down, you might keep a mental stop, but by the time you sell it..in a falling market, hence the need for the stop, you'll get the worst fill.
Stops in the OTC market work in a numberof ways..the two being:
1. You keep a mental stop, and as it hits your number, you then sell it out using the various systems. I think this is less preferable to a hard stop given to a firm that handles and works your stop.
2. You give a stop-capable firm your stop. What does the firm do with it?
a. The firm could work the trade from there desk. Hence , you need a firm that truly works your order, not making markets, etc. or
b. the firm could place the order with a quality market maker that gives assurances if not guarantees that you'll get you stop the very second it hits your number. This to me, while it has its downsides , is the more preferable. In my experience, the market maker if they do as they say, gets you a good fill, the stop price, while the market in the stock is tanking...to be honest, these types of stops are the worst trades they want, having to honor a stop price in a tanking market.
We work the orders in both manners depending on the stock, the action, etc. There are about 3 market makers that I might leave the order with, but each of them is relatively honorable. We can workthe order ourselves which we do many times depending on the stock, but it varies from situation to situation, all depending on what we feel gets YOU the best price.
NOW, finally coming to answer the question as to whether market makers see eachothers stops. No, they dont. There is no electronic system that lets you see others stop orders. Nonetheless, it is possible that if the market maker with which a firm may have given a stop seees your sell stop at 10 1/2 on THEIR books, and they are currently the only bid at 10 5/8,noone at 9teenies, they could step down and take your stock at 1/2 instead of 9/16. For this reason, Yamner ensures that it is never the first print at the stop or lower,that is, it isnt your order that is first to go, which minimizes , but doesnt elminate the potentiality for the situation you are discussing.
So, can a particular market maker, with your stop order on their books, infact drop their superior bid, below your bid, and try to take your stop stock? yes. Do I think it happens alot?
Well, let me put it to you this way...market makers make money based on spreads between what they buy and sell stocks at ...just like anyone, they will employ every LEGAL means of maximizing those gains...if they thought they could do that, then they would.
But we dont find ourselves in that situation...i would never place a stop with a market maker that was making the best bid.
When it comes down to it, its pretty clear. The nasdaq is deficient relative to the NYSE when it comes to stops. Nonetheless, with the right firm working for you and a stop properly placed, it can be done well enough. It wont be perfect...it might be, but dont expect it to be so every time. And ultimately, given the importance of stop orders in minimzing losses, I would say its advantages outweight the downside.
Regards,
Steve@yamner.com |
