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The difference between a stop-limit order and a stop or limit order is explained very eloquently in this response:

Selling is the same, but the directions are opposite. Suppose the stock in the example above has a current price of $46 and you put in a stop-limit sell with a stop price of $41 and a limit of $40. When the stock drops below $41, a limit sell is placed that will sell your stock for at least $40 if possible. If the stock drops below $40 before your limit order can be filled (e.g. because there are many other sellers front-running you), then your limit order is not filled until the price comes back to $40.

Suppose 'ABC' stock is currently trading at $46 and I place a stop-limit order with stop = $42 and limit = $40. I would expect my sell order to execute somewhere between $40 - $42. If the stock does not reach $42, my trade will not be executed.

If the stock hits $42, what determines whose trade gets executed first? Is it executed on a first come first served basis? In other words, if I submitted my stop-limit order on July 1st and Mr. Smith submitted the identical stop-limit order on July 15th, is my order guaranteed to execute before Mr. Smith?

Can I be confident that if I was the first to submit a stop-limit order within a certain range, it is (virtually) impossible for me to wake up the next day and see the stock price well below my stop-limit order price (as long as someone wants to buy in range of $40 - $42)?

Is there any flaw in this approach?

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Order matching on major exchanges is done on price-time priority.

If the price is the same and both the orders are the same type (buy/sell), then whoever has placed the order earlier has the higher priority when the orders are filled.

So yes, your order will execute before Mr. Smith's order IF counter parties are available in the $42 to $40 price range. While it is guaranteed that your order guaranteed will execute before Mr. Smith's order, there is no guarantee that your order will be filled:

  • Price gaps down from above $42 to below $40

  • Other orders have price-time priority over yours and they are being filled as XYZ drops. By the time your order gets to the front of the line, price has dropped below $40 (a fast market).

  • Thanks! Great answer, two quick questions. 1) Does it matter which broker I use? Or all brokers get same treatment in terms price-time priority? 2) If someone submits a market order (as appose to stop-limit) at $40 - $42 would it take precedence over my stop-limit? Or once the market reaches $42 my stop-limit becomes a normal market order? Thanks! – S.O.S Jul 24 at 15:18
  • Assuming that your order is being entered into the system promptly, it doesn't matter what broker you use. Time-price priority is a function of the exchange. As for your order, it doesn't become a normal market order because you have the conditional $40 limit on it. Here's some discussion which isn't directly relevant to your question but perhaps some of the links may have useful info: money.stackexchange.com/questions/45983/… – Bob Baerker Jul 24 at 15:41
  • Thanks! Up voting and accepting this is the answer! BTW, I asked a related questions on SE: money.stackexchange.com/questions/111760/… wondering if you have any thoughts.. – S.O.S Jul 24 at 15:51

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