A market maker rather innocently practices passive stop hunting as part of its job. Every instant, market maker software plays matchmaker for 2 types of orders: limit and market. Limit order explicitly specify a price. This specificity means that limit order matches are made first.

Once limit orders are cleared, matches are made for market orders. It is here that market making gets a bit rangy. A market order acts basically as: fulfill the order if the price is in the neighborhood. Market maker software decides how far the neighborhood extends (in terms of price). Basically, the more volatile the stock, the bigger the neighborhood price-wise. All market orders in the neighborhood are instantly filled, where neighborhood is defined by matching buy and sell orders in the vicinity, where vicinity is decided by black-box rules. A key factor in vicinity is promoting volume. Market makers are in the business of making trades, which gleans a bit of profit in each instance. When it comes to trades, volume is treated as: the more the merrier.

Once the neighborhood is cleared, the next round of trading begins: limit orders first, followed by market orders. Thus a session proceeds.

A Stop order is always a market order. Though your profit target is a limit order, a Stop order must be a market order. If a Stop order was a limit order, a stock’s price could whiz by that set Stop limit, in which case the Stop order would not get executed, letting loss grow unchecked. By contrast, a Stop market order always executes, as that market order will always be “in the neighborhood” when the price goes running away, compounding loss.

So, market makers practice passive stop hunting as a normal, even necessary, part of trading mechanics. But market making is not really passive, nor is it hunting. What has been described here as passive is not typically considered stop hunting. But, with too tight a trailing stop, market making can prematurely end your bet: so, to you, it may feel like stop hunting.

By contrast to the passive variety, which deals in a neighborhood of a very few pennies (per share) at most, aggressive stop hunting can be a serious hazard to traders who use stop orders. From here on out (and by definition), the term stop hunting refers to the aggressive form.

Institutional investors dominate. They are financial firms of all kinds. When it comes to trading in the zero-sum stock market, they are predators after prey. Via automated software, they practice stop hunting as a matter of course. Stop hunting happens via cunning algo.

Stop hunting happens for 2 main reasons: to plunder from the price movement that ensues, or to grab liquidity, providing cover for a large trade that would otherwise move the market.

Corporate algo plunders from volatility by creating a pullback, then entering at the point where the pullback begins to revert to trend. Meanwhile, minuting works on the same dynamic. The difference is that you don’t have the power to create a pullback, only the tools (courtesy of SST) and wiles to take advantage of it.

Institutions need volume to enter or exit large positions with minimal market movement. Ironically, stop hunting makes that liquidity: generating a little volatility (a pullback) to avoid creating a cascade of larger volatility (a reversal).

Stop hunting is abetted by retail traders, who cluster their Stops around obvious swing points, making them easy targets. Round number prices (e.g., $6.50, $10.00) act as magnets to retail traders. Day traders often use the previous day’s high or low for their Stop points. Finally, Fibonacci retracement levels are popular Stop zones. Algo knows these tells. So, stop hunting is engendered by retail lemmings practicing facile technical analysis.

By contrast, minuteers hide their intent. There is no telling what a minuteer will do.