When I put in a stop or a stop limit order, does it get filled ahead of regular sell orders? (August 19, 2003)
Stop loss and stop limit orders are designed to protect you when positions you own start to fail, but they are rather poor vehicles for doing that. If bad news comes out on a stock you own and it gaps below your stop point, you won't be protected. With a stop loss you basically have a market order in place and will be taken out at the point where the stock starts to trade, and that can be well below the stop point you set. A stop limit won't trigger on the gap below the stop price, but again, it does not get you out where you wanted to sell.
As for the order of execution, market orders always get filled first. Your stop loss is a market order and it will get triggered if there is a trade at your price or below your price. That is why you can get a lower trade than you wanted if a stock gaps below your stop loss poit. Stop limits, as with other limit orders, are filled after the market orders. Today you are supposed to get filled if you place a limit at the bid (selling) or the ask (buying) even on small orders, but with options there is no obligation to do so. There was an 'agreement' to do that, but now market makers do not have to abide by that 'agreement' on orders of 10 contracts or less. In any event, limit orders are filled after market orders, and thus in a fast moving market you may not get filled.
Even with the limitations of limit orders we still use limit orders in our buys on options and stock unless the stock is extremely liquid (e.g., INTC). There are just too many things that can go wrong with a market order, and they usually do go wrong, or so it seems.
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