In Hull's Options, Futures, and Other Derivatives 9/e, p39, he states

A stop order or stop-loss order also specifies a particular price. The order is executed at the best available price once a bid or offer is made at that particular price or a less favorable price.

Let's say someone buys one share on the spot market for \$100 with a stop order to sell at \$90. So, if a bid comes into the order book at \$90 or less, the stop order is triggered and the investor's position is automatically closed at best bid, say, $98.

Is this correct? If so, it seems that any market participant could trigger virtually all stop orders just by submitting a ridiculously low bid, which would cause a cascade of market sell orders.


4 Answers 4


The statement is not accurate (surprising because Hull is usually very reliable). A trade actually has to go through (not just a bid to be made) at that price or less favorable price for the order to be triggered.

Illegal manipulation of stop loss orders is possible, but entering a low bid is not sufficient.

Let's say the last price is 100 and you have a stop loss to sell 1 lot at 90. There is a bid for 1 lot at 99 and another bid for 1 lot at 98.

If the wrongdoer enters a bid for 2 lots at 90, nothing much happens and the bid is queued behind the 99 and 98 bids. Now, however, the wrongdoer enters a market sell order for 3 lots. This triggers the 99 bid, the 98 bid and the 90 bid. Since the 90 price has been traded, the stop order is "eligible" and it trades against the remainder of the wrongdoers 90 bid. Once new bids come in the market is restored to 99/101 and the wrongdoer can unload your shares which he bought at 90 at the equilibrium price of 99. (He may make money even though he has to buy back at 101 the ones he sold at 99 and 98).

I repeat that this is illegal, so don't try it yourself. But do avoid having stop loss orders in a thin market.

  • $\begingroup$ question: is it illegal if he has exposure to the underlying stock for what ever small time possible and 2nd is there any systematic way of identifying such stop-loss orders in the order book? $\endgroup$
    – nimbus3000
    Apr 8, 2017 at 19:17

Indeed, this works the way you described: a stop-order or stop-loss order has a price specified and it is ALWAYS executed whenever your stop-price has been traded. Brokers are obligated to execute at the best possible price so that in your example: if you bought @100 and put a stop at @90, then if 90 gets touched, then your stop gets executed and you sell @90 OR (!) at the next best bid.

Please note that the stop guarantees you an execution at best possible bid, but no one can guarantee to you that there will be enough stocks to hit @90 to let you get out of your whole position at that price.

Order books for some products are full of fake liquidity so that one big transaction can simply just cause bid and ask limit orders to shift a couple of price levels without a single trade executed.

To sum up: stop-orders work really badly in low liquidity and full of gaps order books.

Advanced trades use more complex order types to avoid the drawbacks of simple stop-loss orders.


market participant could trigger virtually all stop orders just by submitting a ridiculously low bid

Yeah, you are absolutely right about this. But as someone already have been noticed in US market investors are protected by NBBO and best execution/transparency in execution policies. Also there are various amount of mechanisms which protects free-market-system like: "Block trades", RFQ, min/max possible price (price couldn't be something like +/- XX% from last_traded_price in min_possible amount of time) as an effective mechanism which protect market from such events like "Knightmare", "Flash Crash" and "Fat Finger Error"

So theory is right, but the execution isn't possible anymore

As for some third-world countries (hello, moex!) with developing markets (especially @derivatives) it's a different story and you could do (almost) whatever you want. For example you could sell (minimum amount)x(equities) (shares/derivatives/currency) a bit below market price via limit order and your "last traded price" will trigger all the stops.

For example, scallywag years ago, some firm (let's call it db) use this strategy (called something like "splash-orders") for execution their own orders when they have been required maximum liquidity in one moment of time.

Truth be told it's all about exchanges policies and trading orders. There is a big difference between stop-order and stop-limit order.

  • In first case you'll receive best matching price
  • And in the second case your sell order will be triggered @your_price

And of course, price isn't always calculated and orders (which depending on price) don't match from "last_trading_price".

As for now, almost all of these "thicks" that you're talking about were fixed at the dawn of electronic trading.


There are many ways a stop order can trigger. Whether on last trade, double last, 2 bids/asks below stop level etc. Hulls explanation should include that it's only triggered when the bid/ask at NBBO is below/above the specified stop price, orders that are away from the market price are irrelevant here.


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