The Stop Order That Filled $0.90 Below Its Trigger
At 10:15 a.m. the NBBO for Kestrel Logistics is $48.40 bid / $48.62 ask. Your client Mr. Okafor owns 1,000 shares bought at $31.00 and is leaving for a two-month trip. He wants to 'lock in most of the gain but still sell into a rally if the stock runs,' so he enters a sell order for 1,000 shares with a trigger price of $45.00, good-til-canceled. At 2:40 p.m. the stock prints at $45.10; by 2:41 p.m. it is quoted $44.10 bid / $44.30 ask. Separately, on Monday he bought $9,000 of stock in his cash account and sold it Tuesday for $9,400 before the purchase had settled, then wired the $9,400 out on Wednesday.
1. What order type did he actually enter, where did it fill, and how does that compare with the alternative he was offered?
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A sell order with a trigger price below the market is a stop (stop-loss) order. It rests until the stock trades at or through $45.00, then becomes a market order and fills at the next available price - here roughly the $44.10 bid, not $45.00.
- Realized gain: (44.10 - 31.00) x 1,000 = $13,100, versus the ~$14,000 he expected if he assumed a $45.00 fill.
- The $0.90 of slippage is the price of guaranteeing execution.
Had he used a stop-limit at $45.00, the order would have triggered at $45.10 and rested unfilled at $44.10 - leaving him holding a falling stock with no protection, which is the classic stop-limit failure in a fast market. For a client who is unreachable for two months, the stop order ahead of a stop-limit is generally the right trade-off, but the slippage must be explained before entry.
2. He bought and sold the same position in his cash account before the purchase settled and then withdrew the money. Categorize the violation and the consequence.
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This is a classic cash-account abuse - he sold securities before paying for them and extracted the proceeds. Two labels apply depending on the fact pattern:
- Free-riding: purchasing and selling before paying for the purchase, so the firm's money effectively funded the trade.
- Good-faith violation (GFV): selling an unsettled purchase and using those unsettled proceeds elsewhere.
Either way, the $9,000 was due at settlement on Tuesday (T+1), but his sale proceeds did not settle until Wednesday - and he wired them out that same day.
Consequences:
- The firm must freeze the account for 90 days (cash-only, funds must be settled before purchase) after the violation, with a notice to the customer.
- Three GFVs in 12 months triggers a longer restriction.
- The representative cannot 'fix' this by advancing funds or ignoring it; it must be reported and documented, and the pattern must be considered before he leaves the country for two months.
3. He asks, 'If I sell the 1,000 Kestrel shares Wednesday, when do I actually get the cash?' Walk through the timeline.
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Under the current T+1 standard settlement cycle:
- Trade date Wednesday = the day the obligation is created and the execution price is fixed.
- Settlement Thursday = shares deliver, cash arrives in the account.
- Cash becomes withdrawable Friday if he is selling settled, fully paid shares and there is no other hold.
The distinction to make explicit is trade date versus settlement date: his gain is locked on Wednesday, but the money is not his to wire until Thursday, and the firm may hold it longer. This is precisely the discipline that would have prevented the Monday/Tuesday violation above - the temptation to withdraw is created by treating trade date as payday.