Why Canadian Rules Limit Trailing Stop Limit Offsets
Summary
The document discusses a broker-stated limit on how far a Canadian-market limit offset may sit from a trailing stop price, and asks why such a cap might exist. Its answer frames the issue as a trade-off in stop-buy orders: a stop can trigger during a temporary price spike, while an attached limit sets the maximum acceptable purchase price and helps avoid an unexpectedly expensive fill.
A tighter permitted offset constrains how far the price can move before the order becomes ineligible to execute. The corresponding cost is a greater chance that a fast-moving market passes the limit and leaves the trader unfilled. The response attributes the Canadian cap to regulators' desire to discourage purchases after a large move and reduce reputational damage from spikes or crashes. This is presented as speculation rather than a documented regulatory rationale, and the text gives no formal rule analysis or evidence for the attribution.
Key ideas
- A stop-buy order can trigger during a brief price spike and execute at an unfavorable level.
- An attached limit sets the maximum price a trader is willing to pay.
- A narrow stop-to-limit offset can reduce exposure to sharp moves but can also prevent execution.
- The proposed regulatory rationale is an interpretation in the discussion rather than a cited official explanation.
Tags
Full text
# Why does Canada allow merely 9% spread between the trailing stop price and its limit offset? # Why does Canada allow merely 9% spread between the trailing stop price and its limit offset? I'm assuming that "limit offset" just means "limit price". Help & How-to | Questrade > There is no maximum allowable spread between the limit offset and the trailing stop price for the U.S. markets There is a maximum of 9% allowable spread between the limit offset and trailing stop price for CAD markets Even if no official reasons are published, what are the pros and cons of Canada's cap? ## Answer by nbbo2 (score 2) https://quant.stackexchange.com/a/57932 Stop buy orders are dangerous: you can overpay for a stock when it spikes up (partly from your and others' stop orders all kicking in at the same time), only to have it come back down when the flurry of buying subsides. To avoid this it is recommended that you have a limit on your order as well, so you control the maximum price that you are willing to pay. The drawback of course is that in some cases you will not be able to buy. You must decide where to put that limit price. Canadian regulators think this recommendation is not enough, and require you to put your limit price reasonably close to the stop price. They feel that you should not buy something if it has already moved more than 9% past the price of your stop. They have substituted their judgement for yours, to try to protect the reputation of the market (and theirs). Flash crashes and price spikes make them look bad.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.