On May 26, FINRA issued guidance encouraging firms to review their policies with respect to the use of stop orders during volatile market conditions. The guidance encourages firms to: (1) ensure customers are provided proper disclosures (either through registered representatives or, if a customer is able to enter stop orders online, through prominent disclosures); (2) review the availability or use of stop orders in light of their customer base; and (3) consider whether certain safeguards should be employed.

FINRA proposed that customers be educated with respect to several topics:

  • the price at which a stop order is executed is not guaranteed and ultimately may be materially different than the stop price;
  • a stop order may be executed during a period of volatility that is short-lived, resulting in a sale at an undesired price where markets stabilize shortly thereafter;
  • a sell stop order may exert downward price pressure on a security;
  • placing a limit price on a stop order may afford greater certainty as to the price received by the customer; and
  • information regarding volatile market conditions.

Firms also should consider whether certain safeguards are appropriate, including education or other alerts to customers prior to order entry, restriction of order entry during certain times of the day, designation of the default stop order type as an order with a limit price, and expiration of good-until-cancelled stop orders.

A copy of FINRA’s Regulatory Notice is available here.