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I have read many stock related forums over the years. One thing I have seen many people say is that they refuse to use stop orders because they don't want the market makers to "take out their stop". There seems to be a widespread belief that because stop orders go to the exchange, the market makers can see everyone's stop orders, and they will sometimes manipulate a stock's price to trigger a large amount of stop orders and obtain people's shares. Quite a few people have lamented that their stop order was triggered at the exact low of a move, and then the stock immediately started moving up again without them.

My question is do market makers really try to trigger people's stop orders? If so, how does that benefit them, and is that type of price manipulation even allowed?

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I think that the theory that market makers take out stops in order to screw people is an excuse that people make for placing a stop order that gets executed. The fact that it occurred at the exact low of a move, and then the stock immediately started moving up again without them is a function of the order being placed at that price level and then the security reaching that price and then coincidentally reversing.

The market is an auction. In the absence of liquidity, the market maker makes the market and he is the bid and the ask price. Anyone who comes in with an order with price movement (higher bid or lower ask) then becomes the market on that side.

If the security is liquid, there may be hundreds or even thousands of of orders on the order book in close proximity to current price - and each order may be for 100's or 1,000s of shares.

So riddle me this. You place a stop order $2 below current price and suppose that there are 50,000 shares on the order book between current price and your stop which is $2 lower. Do you really believe that the market maker is going to sell 50,000 shares to drive price down $2 so that he can pick off your stop and then reverse the market? All because of you??? And that 50,000 share number doesn't include the 100s (or more) of buy orders that come in as XYZ drops $2. This conspiracy theory defies logic.

Narrow stops get hit frequently. Wider stops do not and sometimes, the stock just drops to where the stop was placed.

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  • In the example that you provided, if there's only one stop for say 10 shares at $2 below current price, then sure it wouldn't really make sense to try to take out that one stop. But what if there's a price that's viewed as a critical support level and thousands of traders have placed stops just below that level, adding up to millions of shares? Would a market maker have any incentive to try to take out all those stops? – 7529 Apr 15 at 23:22
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    If you trade stocks that are that illiquid, you can expect erratic price movement. In reality, your example is a unicorn. If there's one order for 10 shares below current price, it's nonsensical to place a stop order, let alone own that stock unless it's to OWN that stock. I know a guy online who buys such stocks that rarely trade at all but he's in for the long haul, regardless of price. Stocks that trade by appointment are not for trading. – Bob Baerker Apr 15 at 23:44
  • What about my example of a liquid stock that has thousands of stop orders representing millions of shares underneath a well-known support level? Would a market maker have any incentive to take out those stops if the current price is not far from that support level? – 7529 Apr 16 at 2:09
  • Let's assume that the stops placed are not narrow because they would be easily triggered by random intraday fluctuations. So if there's a price some distance away that's viewed as critical support level and thousands of traders have placed stops just below that level, adding up to millions of shares, don't you think that there are 1,000's of orders adding up to millions of shares that are between current price that magical support level that everyone somehow perceives? It's not a logical conclusion that the market maker has the wherewithal or inclination to suck up such volume. – Bob Baerker Apr 16 at 2:22
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Market-makers are looking at a depth-of-market chart and they do game-the-market as that is a model of human behavior. Basically, the trader needs either a strategy of tight stops or a strategy of wide stops.

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Most exchanges do not directly support stop orders, and even if they did, exchanges would not disclose these orders in their market data feed until they had been activated (i.e. the stop price had been met).

Brokers generally simulate these orders by subscribing to the market data feed, and having their order routing system send the order when the stop price was reached.

There is an illegal practice called frontrunning where market participants try to get information about orders coming into the market before they arrive in the market (allowing them to move their prices in the opposite direction before they arrive). This gets detected and firms involved in it get fined and shutdown.

As far as a market maker moving a price up and down. They are allowed to bid or ask whatever their price they choose, so might try to widen their spreads and move the price up or down to flush out any stop orders. This would be easier for them to do in an illiquid stock rather than a liquid one (where the market maker might be a minority). I am not sure this is inherently wrong, though there are rules against market manipulation. The market maker has to be able to make money somehow (otherwise, who would be willing to make markets).

If one thinks the market maker (or another market maker) behaved improperly, one can raise a complaint to their broker, broker's regulator, exchange, and or the securities and exchange commission. However it is likely that the market maker did nothing wrong.

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