Stop-market orders, which turn into a market order when the stop is breached, are obsolete. Worst case one should set a stop-limit order, which "becomes a limit order that will be executed at a specified price (or better)" when the stop is triggered. "The benefit of a stop-limit order is that the investor can control the price at which the order can be executed" [1].
Your asset manager should know this and broker advise you of it. Then again, I don't think retail traders should have such unrestricted, unsupervised access to the exchanges.
It just means that your stop-loss order is working on unsmoothed millisecond-resolution data when it should be working on smoothed minute-resolution data.
When your stop-loss order executes, it's not going to execute at a smoothed minute-resolution price. It's going to execute at a price that's currently in the book. That means that it's not going to stop your losses if you trigger it with smoothed minute-resolution data. Twenty years ago, it would have. But today it won't, because anybody who took your smoothed minute-resolution price would be giving you an exploitable arbitrage opportunity.
I'm not claiming HFT causes securities market price crashes; maybe it does or maybe it doesn't. I'm claiming that, if a security is crashing, HFT gives it the chance to crash in milliseconds or less, rather than minutes.
Just so I'm not misunderstanding you....so you're saying that flash crashes would not and have not executed stop loss orders? (And also wouldn't trigger far out of the money purchase orders?)
That seems contrary to my understanding of how the market works. If a stock is trading at x and I have a stop loss in at (x-10) and the stock trades down to (x-20), even for a few moments, I would assume my order would execute (this is assuming FIFO execution of orders, and also assuming sufficient volume at that price to exhaust all the standing orders once we are down in that region).
The great-grandparent comment said that the market (specifically stop-loss orders) ought to work the way you thought the grandparent comment said it did work. The grandparent comment, to which you replied, actually described what would happen if the market worked the way it had been proposed to work. You are correct about how the market actually does work, and my comment explains why it works that way.
Holy crap now I'm even more confused. I just want to know if stop loss orders will or will not execute during a flash crash, when the crash price trades below the stop loss price and their is sufficient volume to eat through all the standing orders.
Yes they will trade.
No they will not trade (if they will not, then I'd be curious to know why, which perhaps has been explained above.)
EDIT: Rereading your comment above again, you seem to be of the belief that it will execute - which was the entire point of my argument. People talk as if HFT has no downsides, this to me seems like a clear downside. And saying "well just don't use stop loss orders, or use stop limit orders" isn't a valid counterpoint. A stop limit can still execute, the problem is when the stock dips down for a two minutes and then returns to where it was, but now you no longer hold the stock.
Sorry for the confusion. Absent experience, I believe that stop-loss orders will execute during flash crashes, because you don't know if a crash is a flash until it's over, at which point it's too late to stop your loss. Is that clearer?
