U.S. brokerages are taking steps to change the way their agents trade in an attempt to protect clients from the next big selloff.
Wells Fargo & Co, for instance, has instituted an early-warning system that interrupts brokers and advisers trying to enter stop-loss orders, which were accused of inflaming the August "flash crash" and resulting in deep losses for some investors.
Bank of America Corp's Merrill Lynch unit is discussing whether to ban such orders altogether, according to people outside the company aware of those conversations.
Investors with advisers and brokers were among those scarred Aug. 24 when U.S. markets sank so quickly that trading in many stocks and exchange-traded funds was repeatedly halted.
Now, when Wells Fargo advisers place stop-losses on ETFs, closed-end funds and some other securities, they see a pop-up warning suggesting a "limit" order that could be processed only at a certain price or better.
Analyses of summertime trading glitches by the U.S. Securities and Exchange Commission, ETF issuer BlackRock Inc and the New York Stock Exchange blamed stop-loss orders as a primary issue on Aug. 24, warping the market's ability to absorb sales of stocks and ETFs. [nL1N14I1A3] [nL1N1262HK] [nL2N15C3IV]
Stop-loss orders allow investors to automatically sell an investment after it hits a pre-determined price. They are used by investors hoping to minimize losses.
The problem is that once the target price is reached, stop-losses become "market" orders and are executed at the next available price. During fast sell-offs a stock or ETF's price can crash through the stop-loss level, causing the investment to be sold at a lower price.
This happened on Aug. 24 when some ETFs and stocks sank 30 percent or more from their prior-day close minutes after trading started, only to recover later that day.
Analysts have said making changes to order types could help prevent fast selloffs. The NYSE, owned by Intercontinental Exchange Inc, is no longer accepting stop-losses itself. But the exchange said most such orders are launched by brokerages; when a brokerage executes a trade triggered by a stop-loss order, it comes to the exchange simply as a market order.