Implications of NYSE Trading Restrictions

on November 22, 2015

NYSE stop and GTCThe early reporting of the news from November 16, 2015, was surprising. As of February 26th, 2016, the New York Stock Exchange (NYSE) is no longer allowing accepting new stop or good ’til cancelled (GTC) orders. Additionally, any existing orders will be cancelled as of that date. The link to the NYSE announcement can be read by clicking here.

A stop order is an order to buy or sell a security once its price reaches a specified price, known as the stop price. There are two types of stop orders, buy stop orders and sell stop orders. A buy stop order is set to buy a security at a price higher than it currently trades. A “sell stop” order is set to sell a security (that you probably own) at a price lower than it currently trades. Once the security reaches the stop price, the trade instructions change from a stop order to a market order. A market order fills at the next available price.

A good ’til cancelled order is easier to understand, and it becomes part of a typical stop order. Because the security may not reach the stop price on the day the order is placed, a good ’til cancelled order holds the order open for an extended period of time, often for a period between 30 and 90 days.

When the NYSE was asked why they were cancelling these types of order, a NYSE spokeswoman said,”We expect our elimination of stop orders will help raise awareness around the potential risks during volatile trading.”

However, the story doesn’t end there, and this is where it gets pretty confusing. Most of us don’t directly trade on the floor of the New York Stock Exchange. Most of us access our securities through intermediaries who have access to the NYSE. And the NYSE said that although it is stopping the trading practice, the intermediary firms can continue to offer the stop and GTC order types to their clients.

As a result, the firm who serves as my custodian, Pershing LLC, has said that it currently plans to allow customers to place stop and GTC orders after the NYSE deadline. I strongly suspect that their position is not extraordinary, and probably most custodians/brokerage firms will also offer stop and GTC orders. I would suggest, however, that you talk to the firm who clears your trades and ask if those strategies will continue to be available to you. Remember, though, that stop and GTC orders may not be appropriate for your investment accounts.

I’m not sure what the long-term implications of these changes will be. I understand that if the trades were truly blocked to everyone, market volatility might be reduced, as the NYSE spokeswoman suggested. However, if customers can still place the trades indirectly, I’m not sure I see how this new restriction does anything other than introduce additional risk into the market. I recommend that you talk to your financial professional about the implications for your account.

Be Prosperous! Peggy

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