Quote from: Qoheleth on November 14, 2017, 02:08:17 AM

Quote from: thinair on November 13, 2017, 05:00:05 PM

Another thing I forgot to mention. In a very honest implementation of a trading platform (as it should be):

All stop loss orders will be executed exactly at the stop price - not one bit lower or higher.

Uh, isn't that impossible in a lot of cases? The exchange can't control when and where market makers decide to place - or cancel - a limit order. How could they possibly guarantee that a stop loss order will find someone else willing to buy, at exactly that price, in the middle of a crash?

Or are you suggesting that exchanges should be the counterparty themselves? That seems like a recipe for disaster.

I think I am correct. The trick is to consider what the next market quote would be if a match from the order book is confirmed. A stop order can nullify such a confirmation.

Let's examine only stop loss; there are:
1) sell order queue - now 7100, next order 7200.
2) buy order queue - now 7000; next order 6800.
3) current highest sell limit - 6900, next 6800.
So the current quote is:
   7000/7100.
Say a sell order come in at 7000 (or lower!) replacing the best sell queue; it could be matched at 7000. Before we confirm the match, we see what the next market quote would be if it is matched; the next quote would be:
   6800/7100.

This quote would mean a seller may come to match the buy at 6800 and the market would drop below   the stop limit of 6900. Whenever such a situation occur, we do not confirm the trade at 7000. Instead we match the buy offer of 7000 from the queue with the stop limit sell of 6900. We confirm the trade at 6900, giving the buy 7000 a better deal at 6900. Trade would be done at 6900. The market quote now becomes:
   6800/7000

This is the trick that ensures a stop limit sell would be done at the exact stop limit price and never lower. In very volatile markets, the next best buy/sell orders may differ from the current by appreciable amounts. The trick here will still ensure a full exact execution of limit orders.

I could be wrong missing some other considerations.