Stop out
Family III · Risk
Not to be confused with margin call, stop loss, stop order, stop market order.
Stop out is a risk-control mechanism used by leveraged trading venues. When a client's account equity drops to the broker's stop-out level, expressed as a percentage of used margin, the broker closes positions without further notice. The level is set by the broker and can vary by entity, account type and regulatory regime.[1]
How the stop-out level works
Equity is the account balance plus or minus floating profit and loss. Used margin is the amount locked to support open positions. The stop-out level is a percentage of used margin; when equity divided by used margin falls to that percentage, the broker begins closing positions.
Common stop-out levels are 50%, 30% or 20%, but the exact figure is broker-specific and may differ between jurisdictions. Some brokers close the largest losing position first; others close all positions at once. The method is stated in the client agreement.
Worked example
Relationship to margin calls
A margin call is a warning that equity has fallen below a higher threshold, often 100% of used margin. The stop out is the later, forced liquidation that occurs if the margin call is not remedied. The gap between the margin-call level and the stop-out level is set by the broker and varies.
Often confused with
- margin call
- A margin call is a notification that equity has fallen below a warning threshold, while a stop out is the forced closure of positions at a lower threshold; the visible sign is whether the broker is asking for more funds or has already closed trades.
- stop loss
- A stop loss is a client-placed order to close a position at a chosen price, while a stop out is a broker-initiated closure based on account equity; the visible sign is who set the trigger and on what basis.
- stop order
- A stop order is an instruction to open or close a trade when a specified price is reached, while a stop out is an account-level liquidation; the visible sign is that a stop order is tied to a price and a stop out is tied to a margin percentage.
- stop market order
- A stop market order becomes a market order once a trigger price is hit, while a stop out is a broker's forced closure of positions; the visible sign is that a stop market order is placed by the trader and a stop out is placed by the broker.
See also
References
- ↑ European Securities and Markets Authority, product intervention measures on contracts for differences sold to retail clients, 2018 — leverage caps by asset class, margin close-out and negative balance protection; carried into national rules across the EEA thereafter. Applies to clients classified as retail. Professional clients fall outside it.