Please explain your understanding of IB stop order execution logic

J

jimrockford

I am having a bit of difficulty understanding information from IB documentation and from IB employees, as to the logic IB uses for its "last price" method for triggering stops. Maybe IB customers with more experience in this area of IB would be able to give me a better understanding. My equity trading, in the past, has pretty much steered clear of IB equity stop orders, for example, by using conditional orders triggered by futures contracts, so that my knowledge of IB's equity stop orders is limited and definitely needs improvement.

My understanding of IB docs is that a stop should not trigger, using the "last price" method, simply because a trade is reported at or outside the stop trigger price. My understanding of the "last price" method is that the bid (for a buy-stop), or the offer for (for a sell-stop), at the market center where the order is to be sent, must also reach or penetrate the stop trigger price.

I believe I was told by one IB employee that IB's stop trigger logic will ignore executions reported at prices more than 0.5% away from the bid-ask spread, which makes sense to me. I was told that IB calls this the "leeway". Another employee gave me a conflicting explanation. He said that the 0.5% leeway means that if a trade is reported at or through your trigger price, AND if the bid-ask spread is within 0.5% of the trigger price, then the stop will trigger. This employee told me that a stop trigger, on the "last price" method, even if the bid-ask spread never reaches the trigger price.

I am trying to understand all of this, because today, I had a sell-stop which was triggered by a trade lower than my stop trigger price, even though IB time and sales show that the bid never dipped down to my stop trigger price. It seems to me, based on IB documentation, that my stop should not have triggered, because the bid never dipped down to the trigger price. I suspect that my understanding of the trigger method is the problem, and I hope that somebody will help educate me as to the exact logic used by IB's "last price" stop trigger method.
 
What I think is that the fact that there was a trade that occurred through you stop implies that there was a bid at that price also whether it was published or not.

Was there an intraday gap?
 
Quote from ddunbar:

Help me understand...


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* Stop Trigger Price
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* Last Trade (and execution of Stop.)

Correct?
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No, since the bid never got down to the sell-stop trigger price, the execution of my sell-stop occurred well above the stop trigger price. The reported trade, which triggered my stop, had occurred well below my stop-trigger price.
 
Quote from ddunbar:

What I think is that the fact that there was a trade that occurred through you stop implies that there was a bid at that price also whether it was published or not.

Was there an intraday gap?
More...

No, the fact that a trade occurred below my stop trigger price does not at all imply that there was a published bid at that price. Stops cannot be triggered by unpublished bids. Published bids are the only ones that matter.

The reported trade, which triggered my sell-stop, was a spike well outside all published bids, and certainly the INET published bid, where my order was direct-routed (at my choice). My understanding of IB documentation is that IB's last price trigger method should not trigger in such circumstances, because the bid-ask had not approached the stop trigger price.

Anybody?
 
Stop orders are supposed to be triggered by the "last" price, but some retail firms trigger stops based on the bid/offer passing through the stop trigger price. IMHO, this is insane because we have all seen bids drop 50 cents for no reason, perhaps an error, perhaps just an illiquid stock. My traders don't use mechanical stops, they use alerts at the given price, and then quickly evaluate whether or not they want to close the trade.

Don
 
Quote from Don Bright:

Stop orders are supposed to be triggered by the "last" price, but some retail firms trigger stops based on the bid/offer passing through the stop trigger price. IMHO, this is insane because we have all seen bids drop 50 cents for no reason, perhaps an error, perhaps just an illiquid stock. My traders don't use mechanical stops, they use alerts at the given price, and then quickly evaluate whether or not they want to close the trade.

Don
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Don,

thanks for contributing.

IB offers some choice as to the stop trigger method or conditional order trigger method to be used. Some choices are totally inappropriate for a particular situation, whereas others make more sense. I was trading QQQQ, so that if IB's "last" trigger method works as I thought it did, then I don't think it would be insane, I think it would be very appopriate and effective. My understanding was that the trigger method applies both a test on the last trade price, as well as a test on the bid-ask spread, so the problem you mentioned would be avoided. The problem you mentioned also does not occur frequently with QQQQ. But today, my understanding was contradicted both by what happened to my order, and also by the explanation I got from an IB employee.

Anybody think they can explain IB's "last" trigger method?
 
Quote from jimrockford:

No, the fact that a trade occurred below my stop trigger price does not at all imply that there was a published bid at that price. Stops cannot be triggered by unpublished bids. Published bids are the only ones that matter.

The reported trade, which triggered my sell-stop, was a spike well outside all published bids, and certainly the INET published bid, where my order was direct-routed (at my choice). My understanding of IB documentation is that IB's last price trigger method should not trigger in such circumstances, because the bid-ask had not approached the stop trigger price.

Anybody?
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Ok.

Condition 1 was met:

"One last price value must be less than (greater than) or equal to the trigger price"

The question is, was condition 2 met?:

"The exchange or other market center where the order is to be executed must also publish (and the system must also receive) an ask price equal to or higher than, and a bid price equal to or lower than, the trigger price."

My thinking is, the published trade that is below your stop implies both a bid and ask lower than your stop, published or not. And I suspect that their servers are programmed with this logic. Otherwise, the trade which triggered your stop has to be erroneous and one that will probably be undone before the day is out. It would be one thing if your trade was triggered by an erroneous bid. But it was triggered by a trade.

In any event, maybe an IB rep can explain it better.
 
Quote from ddunbar:

Ok.

Condition 1 was met:

"One last price value must be less than (greater than) or equal to the trigger price"

The question is, was condition 2 met?:

"The exchange or other market center where the order is to be executed must also publish (and the system must also receive) an ask price equal to or higher than, and a bid price equal to or lower than, the trigger price."

My thinking is, the published trade that is below your stop implies both a bid and ask lower than your stop, published or not. And I suspect that their servers are programmed with this logic. Otherwise, the trade which triggered your stop has to be erroneous and one that will probably be undone before the day is out. It would be one thing if your trade was triggered by an erroneous bid. But it was triggered by a trade.

In any event, maybe an IB rep can explain it better.
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This is not the way equity markets work. It is impossible for IB to monitor unpublished bids. IB's documentation refers only to published bids, in my opinion. No published bid went down to my stop trigger price, so I think the execution was not compatible with my understanding of IB documentation. I hope somebody can educate me as to the correct interpretation, and you are right, an IB rep, more knowledgeable than the CS people with whom I previously communicated, would be the ideal person to explain all this.

I think you are completely incorrect in your assumption that the reported trade, which triggered my stop, was erroneous. Market rules provide many situations in which such trades can occur outside the spread, especially for Nasdaq stocks like QQQQ, which will not be subject to SEC trade-thru rules until a future date, upon which certain new provisions of the new Regulation NMS will become effective.
 
I think you've either misunderstood me or I wasn't clear enough.

I'm suggesting that IB's systems monitor unpublished bids but that their system is setup to assume that since a trade occured below your stop, that condition 2 is met by implication. In this case, a published bid is not necessary because the fact that a trade occured implies that there was an actionable bid, albeit an unpublished one.

I know condition 2 says "published bid." But I think the system is programmed to interpret a last trade below as meeting both conditions. This is so that you don't get caught in a situation created by low liquidity were only bid/ask is moving below your stop but last price is still above. There are times when bid/ask may not be keeping up with last price so the system gives priority to last price if it's below your sell stop because published bid/ask may not have kept pace.

That's the way I see it anyway and understood it.

And by erroneous trade, I don't mean that it actually is an erroneous trade but that it could potentially be one which if determined so would lend to your benefit.
 
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