Spikes Taking Out Stops

Q. I trade the news but the broker is slipping my stop orders!!

Being the news bet tart I am, pretty much a straddle over anything I can get my legs around! It wasn't paranoia with getting stopped out by CMC, they were taking the p1s. It's working much better with Ayondo the only problem being the lack of pairs they offer and need CMC for CAD $ and KIwi.

A: I've said this a couple of times but the thing about spread betting companies is they need to make a profit. If you're a **** trader then do what you like... they won't care as they'll make money from taking the other side of your trades and hedging you if you're too big.

If you're a good trader, it all comes down to how well they can hedge you. Their profit will come from the spread between the prices you pay and the open market ones. If you trade a pound a point they can't hedge you. If you trade only news it's very difficult to hedge you. If you scalp constantly, again it is very difficult to hedge you. So you are effectively taking money from them rather than the market. There is no reason at all why they would want to keep your business as you are just costing then money. On the other hand buy shares at twenty grand a point and they'll be very happy to deal with you - they can buy the shares to hedge you; they take the spread as profit and you don't care because you get your winnings tax free. Everyone is happy.

I think what you find is this. Lots of people, as they gain a little knowledge, start to come up with ways to beat the market, or in this case you're counterparty which is the spreadbetting or cfd provider. The old 'let's set up some stops and limits around a semi predictable period of volatility' is basically a re-invention of the wheel when it comes to that kind of data trading with these retail/over the counter products. At first (and on 'demo' trading platforms) you will of course get fills at your levels mainly because of lack of man power - no one has the time to monitor trial accounts or £1 per point traders around 1.30pm on a Non Farm Payroll day so they will often just get filled.

What tends to happen therefore is that people enjoy a few 'free lunches' and then jack the position sizes on the stop & limit orders to a level which starts to show up on the firms radar. Again you may be lucky and get a fill without any/much slippage. The problem is that you have an account history. After a while the firm gets wise to the fact that you are using a particular type of strategy. A successful straddle strategy (from a clients perspective) will almost always be to the firms cost since the whole series of stops/limits.etc get hit in a very short time frame. Due to the short time frame the company cannot offset any of the risk - the money comes straight from their pockets.

It is also true that these over the counter providers make a form of 'intermediate market' which operates between the 'real market' and the grass roots clients like ourselves. The firm may therefore reasonably contend that the trades that you are placing with regard to stops and limits etc may not actually be replicated in the 'real market'. For example, do most folk realise that there is no such thing as a 'stop order' in an actual market context? People get used to using these over the counter providers and learn (wrongly) that stops and limits work identically (but obviously in reverse) and this is not the case. YOU CANNOT PLACE A STOP ORDER IN A REAL MARKET! The only orders which can be placed in a real market are 'Limit Orders' - these effectively make the market as the limit orders make up the two sides of the order book (what some people refer to as 'Level 2' or 'L2 Order Book'). So, a limit order is one of two things, it is either an order below the market 'to buy' if the price drops to a specified level or it is an order placed above the market 'to sell' if the prices rises to a specified level..... I say again.... these are the only two orders which can be 'set' in the market. Of course you can use a 'market order' to open or close positions but this is simply an order to transact at the current market level i.e. hit the limit order which is the best offer (ask) if you are a buyer or hit the limit order which is the best bid if you are a seller. As you can see there is no facility for a 'stop order' and this is why there is so much contention over stops and slippage. So what is a 'stop order' really then??? In the 'real world', away from the over the counter spreadbet and cfd providers, stop orders are either held by your brokerage or by your trading software (or a mixture of both). In the real mechanics a stop order is executed by means of a 'market order'. It isn't that complicated - all that happens is that, the moment that your stop gets triggered (i.e. your stop level is hit), your broker (or your software) creates an instant market order to close your position - being as this is a market order the price that you get cannot be set in advance since the price that you get is determinded by the bids and offers on the order book at the time the market order hits the market - this is why stop orders slip and limit orders don't which makes life a total bitch (in the real world).

Therefore, in essence, by placing stop orders with over the counter providers you are expecting a level of non slippage which cannot be replicated in the underlying market. People often think that the market moves a long way after a data release due to the high volumes of trade which occurs but, in my experience, for a different reason. If you were to look into the market order book before the data was released then you would see that the order book was much thinner than it is normally. A thin order book means low levels of bids and offers at the various levels. This means that it doesn't take much of a disparity in the buying and selling to make the market move one way or the other. Movement in the market itself in turn causes more trades to happen since a sharp move causes other buyers and sellers to react. So what I'm saying is that thin order books followed by brisk volumes of trade is going to cause the market to move and indeed gap quite violently. Of course, people with stop orders with their brokers, are prone to huge slippage because they are effectively using market orders trigger by price movements - this is why, when you analyse the price bars around data, you find such extremes of trade.

In simple terms, if your spreadbetting/cfd provider slips you big time then he is probably telling you that your free lunch pass has run out! Most spread betting providers do not welcome scalpers except for ProSpreads (do not sign up unless you are an experienced trader), which is designed specifically for professional traders and scalpers are explicitly welcome.

Q. Wouldn't a spread betting broker be tempted to spike quotes to trigger stops then move the quotes back to where the market was?

A: This is a myth. I think this would be a silly risk. Spread betting providers offer a price-driven service for spread betting and it is just not possible, not prudent and completely nonsensical for them to skew their prices in any particular direction. Even allowing such a scenario, a provider who attempts to skew the market is going to get arbitraged. The benefits are seriously outweighed by the non-benefits.

This doesn't mean that providers don't make mistakes; in such a high-volume business mistakes do occasionally happen and spread betting providers will usually reinstate the client's position in such cases if you contact them pointing it out to them.

Q. But since they control the system, don't they have the opportunity to cheat?

But isn't there a conflict of interest for your 'broker'...
If you win money, the 'broker' loses...
Therefore they need their customers to lose in order to make a profit.
Since they control the system, they have the opportunity to cheat if they have enough criminal energy and think you won't be able to prove it.

A: This is the same as a broker with the pip hunting and sniping myths. They are all regulated, they do not cheat, they may scalp your order on the real market but that has nothing to do with your order profits/losses directly. Spreadbetters, like, brokers need to have rates in line with the market (the spread betting market I mean). I've used several spread betting providers over the years and I've not come across any such irregularities. They're regulated by the FSA and their prices match out with a separate charting package I use. Order execution has been fine too in my experience. Variances of 1 or 2 pips may be possible but that shouldn't affect trading on a drastic scale.

Q. My stop losses keep getting taken out when the price hasn't breached my stop levels...

They say it is based on Bloomberg futures, but don't show these prices on their website. Is there a way of getting to see Bloomberg futures - and as I am betting on the Wall Street rolling spread (rather than Wall Street daily future) - would the Bloomberg futures price really be applicable?

A: This is a common problem you will encounter with spread betting companies. They usually provide a disclaimer with their charts along the lines of 'Data is indicative'. I had stops taken out when the chart was clearly 0.5 point away from my stop and I was told the same thing - it is based on Bloomberg futures. You have to understand that there is no 'cash' index instrument in the real world, it is only something spread betting companies offer.

One of the reasons spread betting providers use futures prices for their cash index (without premium) is that futures market trades almost 24hrs whereas cash market does not.

As for your stops getting taken out, here's my say -:

Your problem is revolves around your stops being taken out when you don't feel or believe that the market has reached your stop level. It will be the same for every spread betting company, this is not them hunting you down, simply changing the price according to the market (assuming its within market hours).

If you feel genuinely that they are hunting you down specifically or they have made a genuine mistake (which happens sometimes) you can do one of two things:

1) Complain and they will put you back in (this must be done immediately) if not, go to the FSA and they will in turn initiate an investigation, this kind of behaviour brings about heavy fines and eventual shutting down of the firm. This is why they tend not to do it, makes sense right, why risk a huge fine, a bad reputation and possible shutdown for a few hundred or thousand quid. or

2) Sign up with several spread betting companies (unrelated) and ARB them, this means going short with one firm and going long with the other, when the prices then come back together, you make a risk-free profit.

P.S: Every spread betting firm keeps there prices extremely similar so arbing is virtually impossible most of the time, plus with rapping around the spread and the constant moving of prices you could find yourself waiting for months before getting a viable 'hit', only to find that you also get a slow fill making the trade useless and non-profitable. Also, if you do manage to get consistent with the arbitrage, your account will probably get flagged and banned.

Q. But don't stop loss orders stop you from making future profits?

I never place stop loss orders on shares which are underwater but I do sometimes place stop loss orders on some equities which have already made me gains of 25%+.

For instance I set a stop loss on Volvere stock when it was up to more than 35% but set my stop loss to trigger if my return got back down to around 25% (thereby preserving some profits in the process). The share price being at 255 pence, I set a trailing stop loss order at 235 pence (having bought it at 185p) which still locked in a nice profit but which sure enough materialised when the share price dipped. The problem is that the next day the share recovered to 243p but I had exited the position. Not to say that I'm very upset as I'm locking in profits as opposed to losses.

A: A problem I see is that by the looks of it, it sounds like you were trying to use stop loss orders to 'lock in profits' and 'letting losses run' as opposed to 'cutting your losses and running your profits'.

The main problem with stop loss orders is the price gapping which means that if you set a stop loss order at 142, but the market falls to 132 in a spike you might only get 132. As more and more investors use stop loss order, the more likely this tends to happen. Of course there are thing you can do to minimise this:

- Use 'guaranteed' stop loss orders if your spread betting firm provides them (although beware they come at an additional premium).

- Use a stop with limit order which executes only if the price falls beyond level Y but not beyond a lower level Z.

- Don't set your stop loss orders so too tightly or at obvious levels like round numbers.

- You could also temporarily de-activate your stop loss order before the market opens if you believe there is an impending corporate announcement coming which you think might gap your stop order.

 ...Continues here - Phased Exits and Managing Losses

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