Say a stock is trading at $60. You put in a stop order at $55. If the stock hits $55, that order will become a market order and will sell at the market price, which hopefully is close to $55.
Why is the NYSE doing this? It issued the following statement Tuesday night: "Many retail investors use stop orders as a potential method of protection but don't fully understand the risk profile associated with the order type. We expect our elimination of stop orders will help raise awareness around the potential risks during volatile trading."
Here's the problem: When you get rare events like what happened on Aug. 24, when the Dow dropped 1,000 points within a few minutes of the open and then bounced back minutes later, it creates all sorts of stresses on the market system. Stocks trade down big and then recover.
So let's look at an investor who had a stop order that day. Let's take a stock that closed the previous day at $60. Our investor has a stop order at $55, meaning sell it if it hits $55. It opens at $54, so the stop order becomes a market order and it gets executed at $54.
Five minutes later, the stock is trading at $58. The investor is not very happy. The investor had a stop order in to protect against the stock dropping but didn't expect it would bounce back a few minutes later.