Limit orders have been under-discussed on the exchange, in preference to lots of curiosity and experimentation with short selling. As people seem to be figuring out short selling, I have seen more TT questions, and more discussion of limit orders. I think it is about time I tackled this V2 feature.

If you haven’t looked at limit orders yet, they are essentially a sale which is delayed pending the stock crossing a certain price threshhold. The first thing to understand about limit orders is how they are executed, since it will help you avoid some mistakes. I figured this out through some experimentation, reading the explanation of a few problems on Ticker Talk, and by having a decent knowledge of database programming.

A limit order creates a conditional statement for your order. For instance, if you tell the broker to buy EIGHT (currently at $37) with a stop price of $35, it is translated into a statement similar to “buy EIGHT if Price <$35". It then must check the price periodically to see if it meets the condition. There are a few things to notice about the conditional statement above:

1) note that the math symbol is "less than". You cannot put in a buy (or a cover) for a "greater than" transaction. This function is hard coded. For instance, you cannot have a limit order to buy EIGHT if it *rises* over $40. If you put the limit order in with a stop price of $40, it will execute immediately since the current price is less than the stop price. Conversely, you cannot put in a sell, or a short order, for a stock that is "less than" the current price. This makes some degree of sense. Why would you choose to wait until a stock jumped up 2 points before you bought it? If you think it is a good deal, you should buy now.

But some traders might want to liquidate their portfolio in the event of a crash. They might be speculating on a stock, and want to get the hell out of Dodge if it starts dropping in price. In fact, this sort of trading is common on Wall Street. The crash of 1987 was commonly attributed to computers which were programmed to sell in the event of a serious down turn. If you wish to do this on HSX, you are out of luck. This may not be a bad thing, since it avoids computer spurred crashes like the one which hit Wall Street. However, if you do want to cover your tail in the event of a crash. You can always put in a limit order to *short* the stock at a given price. That way, if the market crashes, your short position is executed, and every loss on your long position is matched with a gain in your short position. The problem with this is that in order to put in a buy or a short order, you have to have the money in your account. So having a pending short limit order means that money isn't invested productively elsewhere.

2) notice that the symbol is a ">” not a “> or =”. This means that the limit order will not execute if the price is the *same* as the stop price. I read one or two posts of individuals who were complaining that they put in a limit order with a stop price equal to a predicted adjustment price for a bond, and the order didn’t go through. That is because in the case of a downward adjust, the order will only cover if the price is *less that* the current price, not just equal to it.

3) Also notice that it doesn’t matter what the current price is in our example, as long as the price is below (for buys/ covers), or above (for sells/shorts) the stop price. So if SMGEL is going to downward adjust to $800 (and she is on Thursday – short now!) you don’t want to have your stop price be $800. It has to be greater than $800 for the order to go through. It also isn’t clear how quickly HSX checks its limit orders. You don’t want the price to drop to $800, and quickly rise to $850 by other covers, and never quite reading your $810 cover while the price was less than $810. I will put in an order to cover SMGEL at any price less than $2000.

4) It should also be noted that the conditional statement just tells the computer when to execute the order. The price of the order is determined just like it is for any other HSX transaction, meaning you might get chucked. But even if you do what I will do and put a stop price of $2000 on your SMGEL cover, the order will go through at market price (probably a tad above $800), not at $2000.

5) Trade halts can be bummer. You cannot put a limit order on a halted stock. However, if you get your order in before the halt, the limit order will not be voided by a subsequent halt (we saw this when GCLOO, et al were halted constantly the week before their adjust). The problem this causes is with opening weekend adjustments. If you put in a limit order to sell or cover your position after adjustment, you have to do so before the halt. The thing is that HSX adjusts first, then unhalts. I wasn’t sure whether HSX would cancel the order, or just keep trying until it went through, so I asked on TT whether anyone had tried it. A trader named Double Down responded that he had tried it, and that the trade didn’t go through. I might try it myself this weekend anyway.

Hope this helps.

Yours within limits,

Tom