In Trailing Stop-Limit Orders, what does the Limit Offset mean?

Question

1. I don't understand the "limit offsets" below that I colored red. Why do you need them?

2. In Questrade's example, if the stock rises to your stop price of \$21, then you will be buying at \$21. So why do you need the \$0.1 limit offset?

3. In Interactive Brokers Canada Inc.'s example, if your stock drops to your stop price of \$61.70, then you'll sell at \$61.7. Why need the \$0.1 limit offset?

4. What does the Limit Offset limit?

5. What does the Limit Offset offset?

6. Can someone please edit the picture above to illustrate the effect of Limit Offset? It's easier to understand a picture.

Help & How-to | Questrade

A trailing stop-limit order triggers a limit order to buy or sell a security once the market price reaches a specified dollar trailing amount that is below the peak price for sells or above the lowest price for buys.

The price at which this order type will execute is continuously reset to a higher value if you enter a trailing stop-limit order to sell and the bid price rises. Similarly, the price at which this order type will execute is continuously reset to a lower value if you enter a trailing -stop- limit order to buy and the ask price lowers.

Example – trailing stop-limit order:

If you place a trailing stop-limit order to buy XYZ shares currently trading at \$20 per share with a 5% trailing value and a \$0.10 $\color{red}{\text{limit offset}}$, this will set the stop price at \$21 [$\\\$20$ (current price) + $\\\$20 \times 5\%$ (trailing)]. If the price of XYZ shares increases to \$21 per share, a limit order to buy the shares at \$21.10 [\$21 (stop price) + \$0.10 offset] will be sent. If the price of XYZ shares falls below \$20 per share, the stop price will continuously adjust to be 5% greater than the current price. So, if the price of XYZ shares falls to \$15 per share, the stop price will then be set to \$15.75 [$\\\$15$ (current price) + $\\\$15\ \times 5\%$ (trailing)].

There is a maximum of 9% allowable spread between the $\color{red}{\text{limit offset}}$ and trailing stop price for CAD markets.

Trailing Stop Limit Orders | Interactive Brokers Canada Inc.

##Step 1 – Enter a Trailing Stop Limit Sell Order

You have purchased 100 shares of XYZ for \$66.34 per share (your Average Price) and want to limit your loss. You set a trailing stop limit order with the trailing amount \$0.20 below the current market price of \$61.90. The trailing amount is the amount used to calculate the initial stop price, by which you want the limit price to trail the stop price.

To do this, first create a SELL order, then click select TRAIL LIMIT in the Type field and enter 0.20 in the Trailing Amt field. In a trailing stop limit order, you specify a stop price and either a limit price or a $\color{red}{\text{limit offset}}$. In this example, we are going to set the $\color{red}{\text{limit offset}}$; the limit price is then calculated as Stop Price – $\color{red}{\text{limit offset}}$. You enter a stop price of \$61.70 and a $\color{red}{\text{limit offset}}$ of 0.10. You submit the order.

##Step 2 – Order Transmitted

You transmit your order. The current market price of XYZ is \$61.90, the initial stop price is \$61.70 and the limit price is calculated as \$61.60 or \$61.70 – the 0.10 $\color{red}{\text{limit offset}}$.

##Step 3 – Market Rises

As soon as you submit your order, the price of XYZ starts to rise and hits \$62.00. The stop price has adjusted accordingly and is at \$61.80, or \$62.00– the \$0.20 trailing amount. Your limit price has also adjusted accordingly and is calculated as \$61.70, or 61.80 – the 0.10 $\color{red}{\text{limit offset}}$.

##Step 4 – Market Price Falls

Suddenly the market price of XYZ drops to \61.90. Your stop price remains at \$61.80 and your limit price remains at \$61.70, or \$61.80 – the 0.10 $\color{red}{\text{limit offset}}$.

Sogotrade.com

Why Use this Type of Order?
Long XYZ shares- You bought 100 shares of XYZ at \$110 a week ago and it is currently trading at \$120. You would like to be protected in case the underlying trades lower. You don’t, however want to set a fixed lower stop limit price and don’t want to monitor the underlyings’ every movement during the day.

What to Do?
1) You could use a trailing sell stop limit order that will trail the stock’s upward movement for you and positively adjust the stop price and stop limit price according to the parameters that you have set forth.

Enter the Order: Enter a sell trailing stop limit order, 100 shares, in points, trailing amount of \$2.00, $\color{red}{\text{limit offset}}$ amount of -\$0.25

What Happens Next?
2) XYZ rises to \$130. After the initial stop price is calculated, the stop price will positively adjust automatically, following or trailing the underlying instrument by the amount or percentage that you have chosen.

3) The trailing sell stop limit order has trailed upward and is now at \$128.

Does the Trailing Price Ever Go Lower?
4) No, the trailing sell stop price component of the order will never be lower than the initial stop price and as the underlying is trading lower, the trailing stop price remains fixed at \$128 until it is either triggered at that price or XYZ trades higher than \$130. (The same behavior holds true for buy trailing stop orders where the trailing buy stop price component will never go higher than the initial buy stop price)

5) XYZ rises rapidly to \$145

6) The trailing sell stop limit order has trailed upward and is now at \$143.

When is the limit order sent to the market-place?
7) XYZ has risen to a new high of \$145 and a new trailing stop order price of \$143 has been set. The underlying then proceeds not to go any higher and drops back down to \$143. Your trailing sell stop limit order is then triggered and a limit order to sell 100 shares at \$142.75(\$143-\$0.25 $\color{red}{\text{limit offset}}$) is sent to the marketplace.

Answer 1

The context in which you're asking the question is empirical market microstructure, where the market place is really the limit order book, evolving at high frequency. At this level of market resolution, "price" has no meaning without further specification, and latency matters. There are multiple prices in a limit order book, all evolving at micro-second frequency (on most exchanges). Buy and sell prices are not the same. Similarly, "buy" is ambiguous without specifying the order type---one can buy using different order types, with different execution. "Limit offset" is a quantity you specify when placing a particular type of order, "trailing stop-limit order", that affects how it is going to be executed.

If you just go through your first example:

If you place a trailing stop-limit order to buy XYZ shares currently trading at \$20 per share with a 5% trailing value and a $0.10 limit offset... this will set the stop price at \$21 [\$20 (current price) + (\$20×5% trailing)].

In this scenario, you are trying to buy on the way up, perhaps jumping on the bandwagon of a rising market. You place a limit order to buy if and when price is 5% higher than current price.

If the "price" of XYZ shares increases to $21 per share, a limit order to buy the shares at \$21.10 [\$21 (stop price) + \$0.10 offset] will be sent.

So price does go up by 5% and your limit order is triggered.

Here "price" could mean a number of things. It could be the best ask/best bid/mid-price/etc. The statement below implies that it is the best ask.

the [stop] price..is continuously reset to a lower value if you enter a trailing -stop- limit order to buy and the ask price lowers.

So, more precisely, the best ask rises to \$21---the price you would like to buy.

Now your order is a limit order, not a market order. There is no guarantee that it will be executed. If you submit a limit order at \$21, in a fast rising market by the time your quote is in the limit order book, the best bid could have risen past \$21 and your quote is already stale. Even if it is the best bid, it need not be executed, in which case you've missed the bandwagon.

So you place the order at \$21 + \$0.10. The $0.10 is the "limit offset".

The limit offset takes your buy limit order into the ask-side of the book. In theory, this would ensure its execution.

In this example, the limit offset is the the amount by which your buy limit order will cross the spread into the ask side. The larger the limit offset, the better chance that your limit order will be executed. (In practice, there may be latency issues, etc, especially for retail investors who rely on their brokers to submit their order flow.)

This is a very aggressive type of limit order in that you're placing, or trying to place, a bid quote on the ask side of the book. This is for traders who are not monitoring the market continuously and want to ensure execution.

In your second example, you're selling on the way down---again by limit order, not market order. Here the "price" in "stop price" is the best bid. When your order is triggered, it means the best bid has fallen to your stop price, and your order is placed at $$ \mbox{stop price} - \mbox{limit offset} = \mbox{best bid} - \mbox{limit offset}. $$ You're crossing the spread by the limit offset amount, to ensure (or, at least, increase the chance of) execution. Limit offset or not, the market could continue to fall and your sell quote could be late to the book and not be executed. This is always the case for limit orders.

Note that different platforms could use different conventions in defining the stop price---it could be best bid/best ask/whatever. Trading platforms determine specifications of order types they offer based on customer demand. The purpose of the limit offset is the same, to ensure execution.