Stop Orders Will Not Always Cut Your Risk
By: Rodney Trotter

There are some people that will tell you your risk in futures trading is controlled by placing stop orders. Let me tell you a story about a time that stop orders were worthless.

The day was April 18, 2001. The Federal Reserve Board had been lowering interest-rate since the first of the year. There was some speculation that they might make a change again prior to the next meeting scheduled in May. Articles in the Wall Street Journal and other financial publications were discounting these rumors. Don't believe everything you read. That morning about an hour after the market open, Mr. Greenspan surprised everyone by announcing another reduction in the interest-rate. Within 90 SECONDS after that announcement the S&P 500 market had moved 55 points. That represents a movement of the $13,750 per S&P futures contract. If you were long a contract on that day you just paid for your child’s next year in college. If you are short a contract on that day, your child was not be going to college next year. Traders, who were short the S&P contract and had stop orders in the market, saw that their stop orders were useless. There were very few orders executed during at 90-second move. You may be asking how this can occur. Something that is not well known is the rule of a fast market. In a fast market your broker is not held to any orders. That means if the price moves through your stop price and a broker cannot get your trade executed, you have no recourse.

So what is the definition of a fast market? The S&P pit is called an open out cry market. The traders in the pit signal bids and offers all across the trading pit verbally and with hand signals. In a normally progressing trading session there is even and tractable flow of the bids and offers across the trading pit and everyone in the pit knows the current price. In a fast market this is not the case. A fast market condition is defined as inequality of bids and offers across the pit wherein the changes occur so rapidly they cannot be recorded. In other words, on one side of the pit the contract is being offered for a price significantly different from what it is being offered for on the other side of the pit. Under these conditions brokers are not held responsible for order execution. On that day in April 2001 we had the fastest moving market in the history of trading in the S&P 500 futures contract. People who were short a contract on that day saw themselves lose over $13,750 per contract in 90 seconds. I think this answers the question - Is there risk in futures trading?

I do not want to scare you away from trading futures. I just want to make you aware that these rare events, as I just described, can and do occur in the markets. You could trade the S&P contract for the next 10 years and not experienced this type of event again but you must be prepared for it to happen tomorrow.

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