Stop Orders and Stop Limit Orders

The stop orders rule is short and it turns on a single word: transaction. An order that activates on a quotation, or on any other event, is a different product with its own disclosure duties.

Must a Member Accept a Stop Order?

A member may, but is not obligated to, accept a stop order or stop limit order in a security. The rule then defines both by the same trigger.

The difference between the two is what the order becomes once it activates. The trigger is identical.

The wider taxonomy of order types is covered in the unit on understanding order types.

Exam Tip: Gotchas

• Acceptance is optional. A member may decline stop and stop limit orders entirely, and the rule says so in its first sentence.
• The trigger is a transaction, not a quotation. A printed trade at or through the stop price activates the order; a bid or offer at that price does not.
• A stop limit order can go unfilled after it triggers. It becomes a limit order at the limit price, so a market that keeps moving away leaves it resting.

Which Stop and Stop Limit Orders Fall Outside the Rule?

The rule shall not apply to a "not held" stop or stop limit order.

The rule does not define a not held order. It removes that order from its own scope entirely rather than modifying how the order works.

Exam Tip: Gotchas

• The carve-out is total. A not held stop or stop limit order is outside the rule, so the rule's definitions and its routing duty do not reach it.

What Are the Rules for an Order With a Different Trigger?

A member may, but is not obligated to, accept an order type that activates as a market or limit order using an event other than a transaction at the stop price as the trigger, the rule's example being a quotation at the stop price.

Where a member accepts such an order, three requirements attach:

• The order cannot be labeled a "stop order" or a "stop limit order."
• It must be clearly distinguishable from a stop order or a stop limit order.
• The member must disclose to the customer, in paper or electronic form, prior to the time the customer places the order, a description of the order type including the triggering event.

A member that permits customers to engage in securities transactions online also must post the required disclosures on the member's website in a clear and conspicuous manner.

Exam Tip: Gotchas

• The alternative-trigger order is permitted; the label is not. Nothing stops a firm offering a quote-triggered order, so long as it is named something else and is clearly distinguishable.
• The disclosure has to name the triggering event. A description of the order type that omits what activates it does not meet the requirement.
• The website posting is an addition for online firms. It sits alongside the disclosure to the customer before the order is placed, not in place of it.

What Must a Member Do When It Routes One of These Orders Away?

Two routing duties, measured against different standards:

• A stop or stop limit order. Where a member routes a customer stop or stop limit order to another broker-dealer or exchange for handling or execution, it must take reasonable steps to ensure the order is handled or executed by that broker-dealer or exchange in accordance with the rule's opening paragraph, the one that defines both order types.
• An alternative-trigger order. A member that routes such an order must take reasonable steps to ensure it is handled or executed in accordance with the terms of the order as communicated to the customer placing the order.

Exam Tip: Gotchas

• The two duties point at different benchmarks. A stop or stop limit order is measured against the rule's definition; an alternative-trigger order is measured against what the firm told the customer.
• Routing away does not end the duty. The routing member owes reasonable steps to ensure the receiving venue handles the order correctly.

What Should You Check on Exam Day?

• Ask what triggered the order. A transaction at the stop price is the rule's trigger; a quotation is not.
• Confirm what the order becomes on activation: a market order for a stop order, a limit order at the limit price for a stop limit order.
• Check for a "not held" instruction, which takes the order outside the rule altogether.
• On a quote-triggered product, confirm the label, the clear distinguishability, and the pre-order disclosure naming the triggering event.
• On a routed order, match the benchmark: the rule's definition for a stop order, the communicated terms for an alternative trigger.