Monday, May 13, 2013

StopLoss order ineffective when markets crash

In terms of execution price, I feel limit orders are honored by the exchange (FX has no exchange), whereas StopLoss is a “best-effort” promise.  Key is the “rollback” strategy.

* For a limit buy/sell, if the sell-side can’t fulfill your order, you roll back to the original empty position.
* For a SL sell (for simple illustration) order, you already have a long position. When market moves against you, that position has very low MV, potentially $0 MV. If sell-side can’t fulfil your specified price, you can’t rollback to original position. Instead you must grab the next best and exit at an inferior price than specified. 



Yes, your loss will be $2100. The stop loss will not limit your loss to just $1000. These are exception cases which cannot be foreseen. Even for daily trade, if it is volatile and if the currency pair is not actively traded, your loss will depend on the next best price.


Subject: stop loss order ineffective when market crashes
Tanko,

You mentioned FX stoploss order may fail to work. I'd like to learn more from your first hand experience.

This is what I know from reading/discussing.. --

Suppose I have bought USD/SGD at 1.23 so I place a SL sell at 1.22, to limit my loss to S$0.01 (S$1000 loss for a USD100k notional). When market crashes on a Monday morning after a weekend, it opens at 1.211/1/212 (bid/ask), so my SL and other people's SL execute at whatever best bid price there is, which is 1.211 at Monday open and drops further. My long is eventually unwound at 1.209. Loss is  S$2100. In this story, the StopLoss order doesn't limit my loss at S$1000.

Is this similar to your experience?

No comments:

Total Pageviews

my favorite topics (labels)

_fuxi (302) _misLabel (13) _orig? (3) _rm (2) _vague (2) clarified (58) cpp (39) cpp_const (22) cpp_real (76) cpp/java/c# (101) cppBig4 (54) cppSmartPtr (35) cppSTL (33) cppSTL_itr (27) cppSTL_real (26) cppTemplate (28) creditMkt (14) db (65) db_sybase (43) deepUnder (31) dotnet (20) ECN (27) econ/bank` (36) fin/sys_misc (43) finGreek (34) finReal (45) finRisk (30) finTechDesign (46) finTechMisc (32) finVol (66) FixedIncom (28) fMath (7) fMathOption (33) fMathStoch (67) forex (39) gr8IV_Q (46) GTD_skill (15) GUI_event (30) inMemDB (42) intuit_math (41) intuitFinance (57) javaMisc (68) javaServerSide (13) lambda/delegate (22) marketData (28) math (10) mathStat (55) memIssue (8) memMgmt (66) metaProgram` (6) OO_Design (84) original_content (749) polymorphic/vptr (40) productive (21) ptr/ref (48) py (28) reflect (8) script`/unix (82) socket/stream (39) subquery/join (30) subvert (13) swing/wpf (9) sysProgram` (16) thread (164) thread_CAS (15) thread_cpp (28) Thread* (22) timeSaver (80) transactional (23) tune (24) tuneDB (40) tuneLatency (30) z_ajax (9) z_algoDataStruct (41) z_arch (26) z_arch_job (27) z_automateTest (17) z_autoTrad` (19) z_bestPractice (39) z_bold (83) z_bondMath (35) z_book (18) z_boost (19) z_byRef^Val (32) z_c#GUI (43) z_c#misc (80) z_cast/convert (28) z_container (67) z_cStr/arr (39) z_Favorite* (8) z_FIX (15) z_forex (48) z_fwd_Deal (18) z_gz=job (33) z_gzBig20 (13) z_gzMgr (13) z_gzPain (20) z_gzThreat (19) z_hib (19) z_IDE (52) z_ikm (5) z_IR_misc (36) z_IRS (26) z_javaWeb (28) z_jdbc (10) z_jobFinTech (46) z_jobHunt (20) z_jobRealXp (10) z_jobStrength (15) z_jobUS^asia (27) z_letter (42) z_linq (10) z_memberHid` (11) z_MOM (54) z_nestedClass (5) z_oq (24) z_PCP (12) z_pearl (1) z_php (20) z_prodSupport (7) z_py (31) z_quant (14) z_regex (8) z_rv (38) z_skillist (48) z_slic`Problem (6) z_SOA (14) z_spring (25) z_src_code (8) z_swingMisc (50) z_swingTable (26) z_unpublish (2) z_VBA/Excel (8) z_windoz (17) z_wpfCommand (9)

About Me

New York (Time Square), NY, United States
http://www.linkedin.com/in/tanbin