A stopped order is a temporary freeze on a market order by request of a trading firm. The stop allows the specialist executing the order to seek out a better price. If one cannot be found, the specialist must agree to the original price. This is not the same thing as a stop order, a standing request to buy or sell stock when it hits a certain price. Market exchanges typically have specific regulations pertaining to stopped orders that must be complied with in trades.
Specialists execute complex trades on behalf of their firms, who may represent other financial companies or big investors. A specialist might be asked to fill an order for X number of shares in a company at Y price. The firm might issue a stopped order in the belief that it may be possible to get a price better than Y because of a change in market conditions. If this is not an option, the specialist must commit to filling the order at the original price.
Once an order is stopped, the specialist can post a request to fill at the lower price. Other investors and specialists can offer shares for sale at the new price to fill the order. If enough shares are available, the specialist can execute the trade at the better price. The stopped order can allow a firm to take advantage of market fluctuations that cause a drop in value. Without the ability to put a temporary hold on trades before they are executed, firms might run the risk of paying above market value.
Careful documentation is necessary with a stopped order. At the time the original order is issued, the specialist should receive documents clearly spelling out the number of shares and the price. When the firm puts a stop through, new paperwork is generated. The specialist is responsible for filing declarations after the trade is complete, indicating the number of shares and the price. If a problem arises, the paper trail can be reviewed to determine if someone is at fault.
A large stopped order may attract attention on the trading floor. Firms execute big trades carefully because they want to avoid ripples in the market and also want the best deal. If an order is halted before it can go through, other investors may pay attention because this could indicate a change in conditions that might affect their own trades.
