Ask Colin

Why don't Australian brokers accept stop-loss orders?

Actually some do. I once heard someone ask this question at a meeting. The speaker answered that his stock broker was quite happy to take any kind of stop-loss order. However, he qualified the answer by explaining that he was actively trading over $3 million dollars. His broker would do anything he wanted for that business!

For us mortals with less money than this, most brokers will just refuse. It is easier to just say no than argue about it. In fact, as the above story shows it is a matter of cost on the one hand (though you rightly say that the cost of doing it electronically should be very small), but also there are complications on the other.

Before I go into that, there are a couple of my newsletters (see my web site Newsletters page) that discuss this. Some online brokers were listed that did take stop-loss orders, but some may not be still in business and some may have changed what they offer. However, they would be a starting point. I think there may be at least one other online broker that now takes stop-loss orders, however I am no longer prepared to mention names because of issues I discussed in one of my newsletters. I suggest you get a list of online brokers and start asking them.

The complications are that many clients do not easily understand what a stop-loss order could do. A plain vanilla stop-loss order means that if a stock trades at a certain price, sell my holding at whatever price you can immediately. This means that a broker would hit the best bid.

Now, a stock could be trading at $8 something and open the next day at $5 something. If you don't think that can happen, look at AMP! The problem is that if the broker acted on the stop-loss order in this situation, it may or may not be what the client wanted. A dispute could arise. The client might say, but that is different - I now don't want to sell at such a price, I will hold for a rally.

Of course, this is perhaps a special case, but it makes the point. The client needs to be prepared to accept the full implications of their order, even in a disorderly market. The broker may find it better to not get into these situations. Another 1987 crash where the market fell 25% overnight and some stocks were being bid at 30% or less of their prices the night before, would be an unending dispute resolution nightmare for a broker.

So, you will find that those brokers who do offer stop-loss orders will probably restrict them quite tightly. You may, in fact, not be able to protect yourself with a stop-loss order in a big move against you - which is exactly when you logically need it most. So, make sure you ask lots of questions and understand exactly what your stop-loss order does and does not do.

Stop-loss orders are available in the US stock market and most derivative markets. It can be argued that this is because of the greater risk in trading on margin - especially when the broker may be providing the loan and therefore also at risk. The broker will want to be sure to cut you out of a losing position quickly - especially in a fast market against you. The fact that Aussie stock brokers do not generally have this risk may be part of the reason why they do not feel the need to provide this service - especially when it can lead to problems as discussed above.

By the way - I do not use stop-loss orders and would not - even if they were available to me. I invest in a timeframe that allows me to take decisions on end-of-day data. In rare cases where a stock is very close to my stop AND I am concerned about it, I would monitor it during the day.

Short term traders should never have their eye off the market. If they cannot watch it, they need an alert system. My broker provides SMS alerts - you can then do what you have to when an alert arrives.

Keywords: