Pending orders at the news: slippage of a different shape

[Shadow Trader]

Placing a buy-stop above and a sell-stop below the market before a release looks neat. The market moves, one order triggers, and a position opens in the direction of the move. In practice, it behaves unlike the diagram.

A pending stop order becomes a market order when the trigger price is touched. If the market gaps through the trigger, the fill comes at the next available price, which can be far from the order level. The slippage on pending orders at news can be many pips. Rapid price moves, quote freezes, and widened spreads all stack up.

Market orders placed after the move have their own slippage, though at least they're placed with visible prices. Pending orders are blind to the conditions when they fire.

Also overlooked is the spread effect. Buy-stops trigger on the ask, and a widening spread pulls the ask up before the bid has moved. An order can trigger before the "real" price reached the level.

Some brokers cancel or reject pending orders placed too close to a release. Others delay processing. The terms of service often mention it.

Platforms treat pending orders at gaps differently. Some fill at the first available price. Others reject the fill if the price is more than a set distance from the order level. A few brokers cancel stop orders that would have filled during extreme volatility and let the client re-enter.

Even stop-limit orders, which are supposed to cap the fill price, can fail in practice: if the price gaps through the limit, the order sits unfilled and the move is missed.

A calmer way to use pending orders around news is to place them a safe distance away and with size reduced, then cancel them quickly if not triggered. Another is to avoid them entirely in the last minute before a release, since the broker may freeze modifications and cancellations anyway.

The record of past releases shows what happened to orders: filled at the level, slipped, rejected. Twenty events produce a clear picture.

How much worse are the fills on pending orders than market orders during the biggest releases?