Limit, stop, stop-limit on the TSX with Questrade

April 1, 2009 9:47 AM

I am having trouble contacting Questrade to ask them this question, and am hoping someone familiar with TSX trading rules can answer this for me:

I bought shares at 45 dollars. If the price of my stock is 60 dollars right now (and going up), and I want to put a stop (or stop-limit) at 57 dollars because I am afraid there is some bad news coming and the stock will plummet suddenly, when the actual price reaches 57, it should trigger my order and sell, right?

However, apparently, on the TSX, stop orders are not allowed, but stop-limits are, but the limit price has to be set equal to the stop price.

1) What is the practical difference, then, between a Stop and a Stop-Limit order if TSX forces the limit price to be set equal to the stop price?

2) If issuing a Stop-Limit on the TSX, will the order be sent to the market when the stock price reaches the value I set for stop/limit, or will it send the order to the market right away because it is not purely a stop order, but actually a stop-limit?

3) What happens if, at the end of the day, the price is still at 60 dollars, but during after hours trading it hits 57, and continues to go down, say to 50 dollars. And then, the next morning, it opens at 50. Does my order get triggered at 50 and that's the price I end up selling at?

Thank you!

posted by omair to work & money (3 comments total)

I would only be able to offer educated guesses on the first two, so I'll wait to see if someone who actually trades on the TSX offers a definitive answer. The answer to #3 is pretty much certainly yes. Those kind of conditional orders are only triggered during market hours, so a big move after hours would trigger the trade at market open for whatever price is then in effect.
posted by Lame_username at 10:24 AM on April 1

1) A stop order will force the broker to wait until one, or perhaps two independent, trades occur on the exchanges at your defined price. It will then place a market order for you. This means you may end up selling at a price much lower than your stop price if the bid falls away. In contrast, a stop-limit order turns into a limit order when the stock trades at the stop price. It may never be filled if the bid falls away. In most practical situations, there is enough liquidity and volatility to ensure your stop-limit is filled, but here is a situation where it will not be:

Stock ABC closes at 60. You have an open, good-until-canceled stop-limit at 50. Bad news comes out and the company gaps down the next morning to 40, then falls from then on. Your stop is triggered at the gap-down, but it turns into a limit order at 50 that is never filled.

2) See above; a stop-limit order turns into a limit order when the stop price is reached. Whether your stop actually ends up on the exchange order books depends on what broker you use and how large your order is.

3) Your stop-loss would be triggered at the open and would turn into a limit order to sell at 57. It would not be filled until the price climbed up to 57.

What should you do, since your broker apparently does not allow you to set a stop-limit order with different stop and limit prices? Some ideas: set alerts to hit your email or cell phone when your stop is crossed so you can handle the situation. Hedge the position with long-dated out-of-the-money options so that you don't suffer losses below some threshold.
posted by fatllama at 10:37 AM on April 1

1) If you have a stop-limit order @57 and the stock drops below that converting your stop-limit order into a limit order @57, the stock must then rise to or above 57 to get sold. So on a day where the stock will falling down constantly, your stock will likely not get sold.

2) The order will be in a TSX market makers book and most likely handled in some automated fashion.

3) After orders prices are generally to your order, unless you specifically placed an after orders trade. In your scenario, your stop-limit gets converted to a limit order @57 at the open. The stock must go up to or over 57 for the limit order to be executed.
posted by stchang at 10:37 AM on April 1