What is a stopped order?
Did you know that there were exclusive orders before? Before, there is an order called “stopped order,” and one can only do it on the NYSE or New York Stock Exchange. We can consider it a special order condition. Here, specialists can delay an order execution if they want to wait for more price improvement. Who is a specialist? They are stock exchange members, and they are often referred to as DMMs or designated market makers. DMMs are people who coordinate and oversee the trading of specific stocks. But what do we mean when we said that there were exclusive orders “before?” We said before because the rules changed in 2016. People are not allowed to perform this activity anymore.
Specialists and stopped orders
Let us assume that you are a stock specialist on the NYSE. Before, you can stop and hold onto market orders if you believe that a better price would be available soon. Then, you could post the market order as a limit order so it would be filled. But why? You might think this could be a massive help in filling a more significant order that is about to come into your requested trade list.
After some time, many changes occurred with how stopped orders and specialists work. Some specialists opted to stay and work for the NYSE trading floor, albeit with the changes. However, stopped orders are not the way they used to be anymore. Specialists used to prevent stopped orders’ immediate execution if they believe there is still a possibility of price improvements. Hence, one of its prominent roles is to lessen erratic movements from massive orders. Before, NYSE tells us that the order will be identified and the specialist needs to require a current market price guarantee if it is stopped. Of course, this is provided that the specialist fails to get a better price. It is possible to stop the orders for some time, but the filling should not exceed beyond the trading day.
Why go through all this trouble?
Specialists have their reasons on why they stop orders. But here is the thing: it can only be possible to guarantee a market price when the order stops. Let us say that a market order came to buy 1,000 shares. The offer is at $15.50 and the shares offered are 2000. It is possible to fill that order at $15.50 instantly. However, if the specialist decides to hold or stop the buy order execution, he must pay $15.50 or less to the buying client. He can also amend the market buy order as a limit order to tighten the spread. It can also be because they could fill the buy order using their own share they are about to sell. Hence, the price is better than $15.50.
Specialists and stopped orders today.
Now that we live in the modern world where we have high technology, the role of specialists in the trading floor became irrelevant. We already have electronic trading. As we mentioned, some remained as specialists on the NYSE, but their role is not the same anymore. They are now called DMMs or designated market makers, and they are on the floor to maintain stocks listed on the NYSE.
