FINRA Provides Practice Guidance on Stop Orders during Volatile Market Conditions (FINRA Reg. Notice 16-19)

FINRA encouraged firms to review their practices regarding the use of stop orders (also referred to as "stop-loss orders"). FINRA emphasized the importance of educating investors by providing them with clear and comprehensive disclosures regarding the risks associated with executing stop orders during volatile market conditions.

A "stop order" is an order that becomes a "market order" when an investor's specified "stop price" is reached. Once the stop order is converted to a market order, a firm is required to execute the order fully and promptly at the current market price. For that reason, the price at which a stop order is executed ultimately may be different from the investor's "stop price," especially during volatile market conditions in which stock prices are moving rapidly.

Specifically, FINRA suggested that firms "(1) educate registered representatives on advising their customers regarding the use of stop orders; (2) disclose risks prominently where investors are able to enter stop orders directly online; (3) review their customer base to determine whether any safeguards should be put into effect around the availability and use of stop orders; and (4) consider whether systemic safeguards around the use of specific order types is appropriate."

This guidance was issued in response to a request made by the Equity Market Structure Advisory Committee in its Customer Issues Subcommittee Report (April 19, 2016).