What Was a Stopped Order?
A stopped order was a special order condition formerly possible only on the New York Stock Exchange (NYSE) that allowed specialists to delay the execution of an order with the intent to improve its price a short while later. A specialist is a member of a stock exchange who serves as a designated market maker (DMM) in order to coordinate and oversee the trading of a particular stock.
In 2016, rule changes permanently disallowed the performance of this activity.
A stopped order was not the same as a stop order, which is a type of order triggered when a stock's price moves past a specific point.
- A stopped order used to be allowed (until 2016) when the specialist on the NYSE floor wanted to prevents an order from executing because a better price may come available.
- Orders were stopped for short periods of time but had to be filled before the end of the trading day, either at the market price the time the order was stopped or better.
- Very few specialists work on the NYSE trading floor nowadays and their role has changed. They are no longer allowed to stop orders in this fashion.
Understanding a Stopped Order
The specialist in a stock on the NYSE was formerly allowed to stop or hold onto a market order, assuming they believed a better price would become available, they could then post the market order as a limit order and it would be filled. They would do this if it would help them fill a larger order coming into their list of requested trades.
The role of the specialist has changed greatly in the last decade, and although a few specialists still work on the NYSE trading floor, stopped orders no longer occur in this fashion.
A stopped order was prevented from being immediately executed by a specialist because the specialist had discretion in filling orders. In particular, an order could be stopped if the specialist thought that an order would get a better price if they held on to it. The purpose was to limit erratic price moves caused by large or multiple orders.
According to former NYSE rules, once the order was stopped, it would be identified and the specialist required to guarantee the market price at that time (should the specialist be unsuccessful in obtaining a better price). Orders could be stopped for some time but must be filled before the end of the trading day.
Why Stop an Order?
A specialist would stop an order for any number of reasons, but they could only do so if they also guaranteed the market price at the time the order was stopped. For example, a market order came in to buy 1,000 shares and the offer was at $10.25 with 2,000 shares offered. Since that buy order could be filled instantly at $10.25, if the specialist held or stopped that buy order from executing, they must give the buying client the $10.25 price or lower.
The specialist could amend the market buy order as a limit order (bid) to narrow the spread, or they could fill the buy order with their own shares that they have to sell, providing a better price than 10.25.
Specialists no longer exist on the NYSE trading floor in the role that they used to play. Electronic trading gradually diminished the specialist's role, and by 2008 the specialist role ceased to be. Specialists on the floor now play the role of designated market makers (DMMs) now help maintain order in NYSE-listed stocks.
Example of a Stopped Order
Assume that a specialist shows on the order book a bid of 1,000 at $125.50 and 3,000 shares offered at $125.70. A market order comes in to sell 500 shares. This order could be executed at $125.50, but instead, the specialist stops the order. They post the 500 share sell order at $125.60, narrowing the spread.
This may lure some buyers into the stock, or it may push the price down. In either case, because the specialist stopped the order they must fulfill the sell order at $125.50 or higher since that is where the sell order would have been filled had it not been stopped.
The specialist could also decide to fill the order from their own pool of shares. They could, for example, fill the order at $125.53, providing the sell order with a bit better price than the current bid.
Specialists might have taken such actions in order to prevent erratic price movements in the stock or to protect themselves. Specialists are required to be actively involved in a stock and provide liquidity. Specialists will try to avoid large losses by buying and selling their share inventory to provide liquidity while limiting risk. As a result, the vast majority of market maker trading is automated.