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Consider a situation where a stock that was performing normally for a while crashes, say because news about a catastrophic development in the company become public. The share price drops from USD 85 to USD 30 during one hour, in what on the chart looks like a straight, steeply diving line, before recovering.

I have set a stop-loss selling order at 70 USD. When it gets triggered, analysis of the stock price graph will indicate that it's definitely going to plummet further before recovering.

As I and thousands of other market participants hurry to sell their stocks, a huge volume of orders is created. In order for my stop-loss selling order to succeed, someone must be buying them. But both automated systems and human traders should easily spot the "hopeless" situation and refuse to buy unless the curve starts to flatten. Even if we allow for some "irrational" market participants, they should not have enough buying power to soak up all the sellers' offers.

So who, and why, actually purchases stocks in the few minutes of an ongoing crash?

NB: A very similar question was asked here before. I consider my question not a duplicate because the other question was about week-long "crashes" and was asking "who is buying" more in the sense of "why would people be so stupid", easily being answerable by looking at daytraders and automated system working successfully on tiny margins and short timescales. My question aims more at a situation where both human and algorithmical market participants have hardly any time to act and it is clear that there is no upturn in sight for the next few minutes.

jstarek
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    Worth noting in many (most) cases this shape appears (fraud, terrible news relating to the company etc) it will just gap down the line and you won't get filled for the same reason you won't get many bids on your house in between the previous value of it and the raw land value if it is currently on fire. – Philip Jan 12 '21 at 08:10
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    "analysis of the stock price graph will indicate that it's definitely going to plummet further before recovering" If mere graph analysis could guarantee the price's trajectory, people would already be out in front short-selling and making a "guaranteed" profit buying to cover at some point before the trajectory shifts. There can easily be steep drops that just stop; momentum isn't destiny. Maybe you're selling to someone who disagrees with you on what constitutes "definitely going to plummet further". – ShadowRanger Jan 12 '21 at 17:09
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    People who think the price won't go down very far and they're going to make a profit by buying the stock from panicking people and selling it once the market is calm and the price goes up again. – user253751 Jan 12 '21 at 18:45
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    Are you under the impression that your stop-loss order at 70 means you'll sell at no worse than 70? – Dean MacGregor Jan 14 '21 at 15:09
  • It can't matter. Broadly, you sell them to "the market" and hopefully, that means there are people willing to buy.

    The reason that doesn't matter is that you don't interact directly with the market but only ever through intermediaries: brokers and agents at various levels.

    If not, you fail to sell the stocks and suffer the loss yourself.

     – Robbie Goodwin Jan 15 '21 at 21:02

6 Answers6

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In addition to what others already wrote:
Be sure to understand what a STOP-LOSS order really does: it does not stop your loss for sure, but tries to do so.

What happens when the stock trades the first time below your stop-loss price is that an order to sell at market price is generated, and your stock is sold with the next transaction (that has enough volume), no matter what price it has.
This next transaction might be above the stop-loss price; just below the stop-loss price; far below the stop-loss price; very far below the stop-loss price; it also might happen one microsecond later; or a minute later; or days later; - or never.
If - as you proposed - everyone agrees that this stock is a dead horse, no further trades would happen, and your stock never sells.

It is a common misunderstanding - from beginners, but also from some supposedly experienced traders - that a 'stop loss' executes at the stop-loss price. This is not what it does.

Aganju
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    This seems to be the most helpful take on the problem: I actually did forget those properties of a stop-loss order, and as soon as one realizes that it makes no guarantees as to when it is fulfilled, my question sort of answers itself: It is indeed possible that no one is looking to purchase in the described situation, and the order just hangs in wait until a more realistic price is reached. – jstarek Jan 12 '21 at 08:14
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    @jstarek It doesn't hang in place. It will find a clearing price in the next microsecond, unless the stock falls far enough to trigger a trading halt. In which case it will wait until trading resumes and then immediately find a clearing price. – Kaz Jan 12 '21 at 09:40
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    If you want to see what that can look like, there's always the GDAX Ethereum Flash Crash. Crypto exchange with no circuit breakers and automatic liquidation if people breach margin requirements. Big market sell order -> price drops 30%. Triggers stop losses and liquidations -> more market sell orders -> price drops more -> more stop losses -> more liquidations which burns through the order book until you get to the crazy people who leave $0.10 offers sitting on the book, just in case. – Kaz Jan 12 '21 at 09:44
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    Whilst true for a traditional stop-loss order, for at least some stocks and at least some brokers, there is the possibility of having a "guaranteed stop loss". Behind the scenes, the broker would probably have been trading on a derivatives market to buy appropriate options, contracts for difference, etc. so they can provide this service without taking on the risk themselves. – Steve Jan 12 '21 at 09:52
  • @Steve except those "guarantees" have counterparty risks. – Yakk Jan 12 '21 at 16:59
  • @Yakk Indeed, and a full explanation of who those counterparties are (those who are obliged to buy at an unfavourable price as a result of such contracts they entered into together with what happens if they fail to honour their obligation) could perhaps form part of a more comprehensive answer to the original question. I've not really dug deep enough into it to know... – Steve Jan 12 '21 at 17:02
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    @jstarek a few years ago a German engineer hit the news by losing 100+k euros cfd trading with just a few hundred or maybe 2k euros betting on the swiss franc. He had a stop loss, but due to a federal reserve decision it took over 30 mins to execute and then did so at a ruinous price. Usually order volumes are so big that you don't go below your stop loss mark, but if you trade illiquid stuff, a stop loss can be a bad idea. – DonQuiKong Jan 12 '21 at 17:45
  • @Kaz That's not always true. For large cap and high volume, maybe, but for smaller cap securities that trade with lower volumes, it very well could be that the order "hangs around" for a while with no buy orders that can satisfy the order to sell. You only get a clearing price within a microsecond if you're trading something with sufficient liquidity. – J... Jan 12 '21 at 18:13
  • This answer has a lot of very poorly worded sentences and just bad information in general. Yea you got the gist but the examples are ridiculous. I spent 15 automated electronic trading systems. Unless we are talking about penny stocks most of this is dead wrong. – blankip Jan 13 '21 at 06:58
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    Some brokers also offer stop-limit losses. You specify the stop and also the limit price, of course at the risk that the price drops through your limit price, and you order doesn't get executed. – Dan Dascalescu Jan 13 '21 at 08:57
  • This is one of the biggest problems with cheap or free trading simulations (whether stocks, options, or forex) such as those used (by people who don't know better) for backtesting algorithmic trading. Among other simplifications, they typically assume that all stop losses execute at the exact price at which they're placed. Stocks often close at one price and open at another one the next trading day with no opportunity to execute a stop loss between those two prices. – David Schwartz Jan 14 '21 at 10:42
  • @Steve Other than buying put options, how/where does one find a guaranteed stop-loss order? – Dean MacGregor Jan 14 '21 at 15:13
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    @DeanMacGregor google "guaranteed stop loss" gives an explanation from at least one broker about the difference between a traditional stop loss and the guaranteed one they offer to their customers - presumably for a fee. It doesn't go into details about how THEY provide the service, but presumably involves buying put options behind the scenes as you say. Looking a bit more closely, it seems its mainly a offered as a feature when trading FOREX markets rather than normal stocks... – Steve Jan 14 '21 at 15:38
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So who, and why, actually purchases stocks in the few minutes of an ongoing crash?

Other investors who are willing to buy at your price (for reasons unknown). You seem convinced that if you are certain of a downfall and the future is hopeless, then everyone else is too. But some may see it as a value buying opportunity. Perhaps other investors see it as an opportunity to "buy low" and hold on until the immediate "crash" is over, profiting on the way back up.

Or perhaps you're right, and you happen to catch a fool on the other end.

Who knows - and who cares? You sold it for what you wanted - why does it matter why anyone else bought it for that?

Maybe more succinctly, think of a famous quote by Warren Buffet (known for value investing):

Be greedy when others are fearful and fearful when others are greedy.

D Stanley
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    @DStanley are you sure "to buy at your price" is true on most (or even any) exchanges for stop-loss order? Isn't it market price and not "your price" (basically buyer's determined price rather than seller's set price)? – Alexei Levenkov Jan 13 '21 at 07:09
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    @AlexeiLevenkov A stop order means "I want to sell when the price goes below X", so I was considering "X" the lowest price at which you're willing to sell. Yes, the actuall trade will happen at market price, which at that time should be pretty close to "X", except in very extreme circumstances. I didn't consider that detail relevant to the question, though.. – D Stanley Jan 13 '21 at 13:45
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    As there need not be any investors willing to buy at your stop-loss price, it is a relevant detail - relevant, because the questioner clearly misunderstood this aspect. Calling the stop-loss price "the lowest price at which you are willing to sell" is itself problematical. One might say it is more like the lowest price at which you are prepared to continue holding the position. @AlexeiLevenkov – sdenham Jan 13 '21 at 18:16
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    The actual question was "who buys what I sell" which is what I answered. Obviously there was actually some other question that was intended but I did not infer. – D Stanley Jan 13 '21 at 18:56
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If you are skilled enough to know that there is no upturn in sight for the next few minutes then you should be shorting the stock during the drop and racking up nice gains. Collapsing share price (in minutes) and parabolic share price increase (in minutes) can reverse sharply in a heartbeat.

In your hypothetical situation where stock XYZ is dropping dramatically from $85 to $30 over the course of an hour (no gap down), when the drop begins, how many people know that the bottom will be at 70? At $60? At $50? At $40? At $30? Absolutely no one.

There are many reasons why buyers step in during the drop:

  • Buyers may be covering short positions
  • If index futures trade at a premium, institutions will arb the difference (buy stocks, sell the futures)
  • Those that previously bought at lower prices and sold for a gain are willing to buy the shares again.
  • Value investors may have a lower price at which they are willing to own the stock
  • Some investors dollar cost average
  • The lower price affords a higher yield which dividend growth investors seek.
  • Collapsing stocks don't decline linearly in a straight line for the entire drop. There may be multiple small price recoveries. Traders utilizing technical analysis indicators observe this and buy, trying to scalp gains.

If it was that obvious to everyone that price was going to drop from $85 to $30, no one would buy on the way down. If you look at the volume traded during such drops, the volume traded during it tends to dwarf normal trading volume. In reality, market participants do not have the predictive clairvoyance that you think they have.

Bob Baerker
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  • "then you should be shorting the stock during the drop" Don't you need somebody to buy the stock you want to short? While it's possible because of the reasons you mentioned, I would assume that there are more short sellers than buyers when e.g. the company confesses fraud or announces sudden bankruptcy or any other obvious disaster. (Of course there is a lot of grey area.) – Chris Jan 12 '21 at 14:46
  • @Chris - Let's be realistic. A company that confesses fraud or announces sudden bankruptcy is a bit of an extreme example for this discussion. If share price is dropping, it's clear from trading if there are buyers. If there are very few buyers, share price gaps down or quite possibly, trading is halted until the market maker(s) can sort things out. – Bob Baerker Jan 12 '21 at 15:15
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    @Chris - And no, it's not a good assumption that there are more short sellers than buyers if price is collapsing. The Alternate Uptick Rule which was created to slow the ability of short sellers from driving the price down, thereby reducing volatility. The rule states that if a stock falls 10% from the previous day’s close, shorting can only be done after an uptick (there is no restriction on those selling their long positions). IOW, once the rule is triggered, shorting cannot be done while share price is falling. The rule applies until the close of the following day. – Bob Baerker Jan 12 '21 at 15:16
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    Thanks, I was not aware of the uptick rule. I took the extreme example, so that the response is more clear and because I think the OP was referencing to something like the Wirecard scandal. As an amateur your sentence about "shorting the stock during the drop" confused me because that leads to the same question OP has posted on who would buy it. Imho your answer would be more straightforward without that part, or if it's moved to the bottom. – Chris Jan 12 '21 at 16:19
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    Good answer. Would a dividend reinvestment program also be added to the list? The timing would have to be right, but there surely is someone "buying" the stock at that moment. – DrSheldon Jan 12 '21 at 21:51
  • Yes, a DRIP plan would be a buyer but not necessarily at that very moment that the stock was dropping. They tend to buy on the Pay Date of the dividend. For company managed plans, they tend to buy on a specific date each month (new cash), perhaps once a month, perhaps twice a month. YMMV. – Bob Baerker Jan 12 '21 at 22:07
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    This is the first answer that doesn't try to oversimplify the market to one or two cases. – jpaugh Jan 12 '21 at 22:21
  • "Buyers may be covering short positions" Why would someone want to cover a short position in a falling market, rather than continue riding it down? – Acccumulation Jan 13 '21 at 19:48
  • If you have the clairvoyance to know how far a short position is going to drop then you should obviously not cover until that price is reached. – Bob Baerker Jan 13 '21 at 20:25
  • @Chris I knew a guy that bought into a 'hot' company when it dropped from 300 -> 100 thinking he was getting a deal. It then dropped to below 20 a few days later. The greater fool is often available. – JimmyJames Jan 14 '21 at 22:34
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Two types of markets

  1. Order book markets where buy and sell orders for trades at different prices wait to be filled. If you trade at market you are filling the most competitive orders.
  2. Dealer markets with market-makers who buy into- and sell out of their inventory of securities like a second hand car dealer.

In case 1), if you have placed a stop loss order then your order will be on the order book and at some point will be filled — just not instantly like a market order.

In case 2) the market maker will fill your stop loss order out of their inventory. In the NYSE Designated Market Makers run an order book like 1) but are also dealers as in case 2). If there are no matching orders on their order book they have to fill your order by buying your stocks into their own inventory.

jpaugh
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Martin Berridge
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Those who want to buy the dip, and those who are trying to catch a falling knife would be two categories.

Dan Dascalescu
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The warnings about stop losses not being guaranteed to fill at your stop loss prices are the most important thing you can take away from this question.

But I'd like to add a little more insight into the psychology of some buyers, mainly value investors. Value investors believe stocks have both values and prices, and attempt to purchase stocks at prices offering a significant discount to what they estimate is the stock's actual value.

The most famous description of how value investors should treat a market plunge is by the Father of Value Investing, Ben Graham, in his "Mr. Market" parable from his book "The Intelligent Investor". His student Warren Buffett explains it here, and I'll try to summarize the key points in what he wrote.

"Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.

...

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game."

SafeFastExpressive
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