Now here's a fairly ugly event that happened this morning.

I shorted Broadcom as it broke through its 200DMA this morning, and is my usual practice, stuck a 25 cent trailing stop order to cover on top of it.

It instantly hit, even though I had Level II up and the ask was nowhere near the stop price.

Not to be deterred, I re-shorted it and set the trailer 50 cents over. It instantly hit again, even though the stock was trading well below $31 and the ask was a good forty-five cents under the stop!

WTF?

Ok, enough is enough. I called E*Trade and spoke to them about this, asking them to break the cover on one of the trades, as clearly that's not appropriate behavior. They flagged it and a few minutes ago called me back.

Their statement was that one of their data feeds comes from Reuters and it showed an ask over my stop price, which triggered the order. They did, however, agree to break the trade.

Uh, guys. Let me explain a few things to you. When I place an order with a brokerage and do not specify routing they have a fiduciary responsibility to get me the best price in the marketplace, not cherry-pick the Level II six or seven levels down from the top to find something to set a trigger off!

This is the first time this has happened to me in using these orders for over a year with them (I used to be on Harris, where I likewise used these orders without incident.)

I understand market dislocation risks (e.g. big spreads due to a dislocation in buy and sell orders) and accept those risks. What is not right, however, is taking an "out of band" data feed that I can't see, using it to determine what the bid (or ask!) is, then using that as a trailing stop trigger!

That makes the whole concept of trailing stops a bad joke.

I am escalating this within E*Trade and will post the results. While they did break the trade for me, leaving me with only the transaction costs on the bad trades as my "expense" (the price is moving the way I expected, so the position is profitable at the moment and its not a big deal) this leaves me with a very uneasy feeling in the pit of my stomach when using these orders to prevent whipsaws from doing bad things to my portfolio.

This is a question you want to ask of your brokerage - before you get surprised. It was definitely an unwelcome surprise to me and does not give me warm fuzzy feelings about the security of orders left on GTC basis, nor on the utility of Trailing Stops on E*Trade in general.

Sigh..... its always something, isn't it?