What Is a Stopped Order?
A stopped order is a market order on the New York Stock Exchange (NYSE) that is stopped from being executed by the specialist because a better price may become available. A specialist is a member of a stock exchange who serves the role of market marker in order to coordinate and oversee the trading of a particular stock.
The specialist may stop or hold onto a market order because they believe a better price will become available, they believe they can post the market order as a limit order and it will be filled, or they are willing to fill the market order with their own shares at the current market price or better if the previous two scenarios don't fill the stopped order.
Specialists no longer exist on the NYSE trading floor, and stopped orders no longer occur in this fashion.
A stopped order is different than a stop order.
- A stopped order is when the specialist on the NYSE floor prevents an order from executing because a better price may come available.
- Orders can be stopped for some time but must be filled before the end of the trading day, either at the market price the time the order was stopped or better.
- Specialists no longer exist on the NYSE trading floor, and stopped orders no longer occur in this fashion.
Understanding a Stopped Order
A stopped order is prevented from being executed by a specialist because the specialist has discretion in filling orders. An order is stopped if the specialist thinks that an order will get a better price if they hold onto it. This helps limit erratic price moves caused by large or multiple orders. According to NYSE rules, once the order is stopped it must be identified and the specialist is required to guarantee the market price at that time, should the specialist be unsuccessful in obtaining a better price. Orders can be stopped for some time, but must be filled before the end of the trading day.
A specialist may stop an order for any number of reasons, but they can only do so if they can guarantee the market price at the time the order was stopped. For example, a market order comes in to buy 1,000 shares and the current offer is 10.25 with 2,000 shares; since that buy order could be filled at 10.25, if the specialist holds or stops that buy order from executing they must give the buying client the 10.25 price or lower. The specialist could place 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. Electronic trading gradually diminished the specialist's role, and by 2008 the specialist role ceased to be. Designated market makers (DMMs) now help maintain order in NYSE listed stocks.
An Example of a Stopped Order in a Stock
Assume that a specialist shows on the order book a bid of 1,000 at $125.50 and 3,000 shares offer 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 may take such actions in order to prevent erratic price movements in the stock, or they may do it 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 both provide liquidity and also protect themselves.