Video: What Investors Need to Know About the NYSE’s New Trading Rule

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Editorial Note: In less than three months, the New York Stock Exchange (NYSE) will implement a new trading rule that is sure to affect many investors. Marc laid out some of the details in an Investment U column last week. But he had some additional thoughts in Monday's episode of Oxford Club Radio.

Because this is such an important issue, we've embedded audio of Marc's comments above. You can also check out a full transcript below.

So, there’s a rule that has just been implemented about – or not implemented but announced – by the New York Stock Exchange you need to be aware of. On February 26th, the New York Stock Exchange will do away with stop orders and good-’til-cancel orders. That is big, big news. Especially anybody who’s followed the Oxford Club for a long time knows that we use stop orders. Any time we enter a stock position, we put in a stop order.

The one exception, really, the only exception that I know of, is in my Compound Income portfolio, because we’re reinvesting the dividends, and in a nasty bear market, as long as the fundamentals are the same, we like to be able to reinvest those dividends at a lower price. But other than that, we have stop orders, and we raise the stops as the stocks go higher. And, in fact, in 2008, that allowed the Oxford Club to get out with – I forgot how many winners we got out with – because these were stocks that’d been bought years earlier. As the market came down in 2008 and we’d raised the stop, we got out with a lotta profits. So, it’s an important policy and an important part of the Oxford Club’s strategy. So, again, the New York Stock Exchange is going to do away with stops. You will not be able to place a stop on the exchange.

But you should be able to, with your broker – most brokers, not all – but most do have policies, where you can place your stop with them, and there’s a difference. So, right now, if you go to, let’s say, T.D. Ameritrade and you put in an order to sell a stock – let’s say we’re talking about Microsoft, and you wanna have a stop order in at $40.00. You say, “Microsoft sell –” you’d say the stop price would be $40.00, and you’d place the order. When T.D. Ameritrade gets that order, they send that to the exchange. Actually, Microsoft’s on the Nasdaq, so that’s a bad example, so let’s use IBM. So, IBM is trading at about $140.00. Let’s say your stop is at $120.00. They send that order to the New York Stock Exchange, and the specialists at the New York Stock Exchange know that you wanna get out at $120.00.

And what happens is if the stock gets close to $120.00, they may manipulate it so that they get your stock and especially if they see a lot of orders at a certain price. And so, what’s happened on some of these flash crashes or some of these big, huge moves down intraday is these stops are getting taken out. So, you see a stock, let’s say, like IBM. Let’s say it falls to $100.00 even, and there’s a whole bunch of stops. All those stops get triggered. There’s a ton more selling. The stop drops to $90.00, $85.00 or whatever it is. That’s in part adding to these flash crashes and these higher-volatility days.

So that’s why the New York Stock Exchange is getting rid of the stops, but you can still get out of these stocks at the prices you want, generally speaking, because most brokers have something, where, instead of sending it to the exchange, it’s just kept on their books. So the exchange can’t see it, and the broker works for you, so they have no interest in selling the stock. A specialist on the New York Stock Exchange can make money by selling you out at a bad price and then buying back the stock lower.

T.D. Ameritrade, Schwab, e-Trade, these guys have no interest in doing that. They want you to be happy so that you’re gonna trade. So you send your order to them with what is essentially a stop price, a stop order. Once that price is hit, then they send the order to the exchange, so it’s very different. The exchange doesn’t have your order ahead of time. When you have a stop order placed with the exchange, it’s like playing poker with your cards up. When you place it with your broker, your cards are face down. The exchange can’t see it.

So, T.D. Ameritrade has something called trade triggers. That’s what they call this type of order, where it’s essentially a stop, but it’s only with the broker and then is sent on to the exchange once that price is hit. And it’s sent pretty instantaneously. It’s not like you have to wait a long time. In a fast-moving market you might get filled at a slightly worse price than if you had a stop at the exchange just because if there’s a big-volume day, a lotta volatility, that difference of a second or two could make a difference. But, generally speaking, you’re gonna be fine, and it’s gonna help you more than it’s gonna hurt you, because, like I said, you’re not playing poker with your cards face up. So, T.D. Ameritrade calls it trade triggers. Call your broker. Find out what they call it. And even though we’re a couple of months before February 26th, it’s always a better idea to place this type of order with your broker rather than a hard stop with the exchange, because, again, you’re not tipping your hand.

So, if you have a stop now, call your broker. Find out what they have in place of a stop that you can have that order just with them. If you have any stop orders, get them transferred. Change it to this other type of order with your broker. If your broker doesn’t offer anything like that – most do, but if they don’t, ask them if they will or how they’re gonna address this issue with February 26th deadline coming up. If they don’t have an answer, you might wanna start shopping for a new broker. This is important. You really wanna have stops or these types of trades in place to get you out of stocks so that you don’t have to think about it.

I’m a big proponent of this, so that your emotions aren’t dictating whether you sell, because when stocks go down and you still like the story and you still like the stock, and you go, “Well, it’ll bounce back. I know something good is coming around the corner,” you don’t wanna do that. You wanna get out. You wanna place your sell trade when you’re not emotionally in it, when the volatility isn’t making you crazy. You wanna have an unemotional state and have that order placed when you buy the stock. Then you can always raise it as the stock goes higher. So, definitely call your broker. Find out how they’re gonna treat this new rule with the New York Stock Exchange and what alternatives they have.

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