Gapping

The condition rather than the chart mark. A market gaps when there is no liquidity at the intervening prices: across a weekend or a holiday, around a scheduled release, on an unscheduled announcement, after a trading halt, or in a disorderly market where quotes are withdrawn and reappear at a distance. A gap on a chart is one visible instance of it; gapping is the general name for the behaviour.

What follows for orders is exact, and it is where the term earns its place. A stop loss order is an instruction to submit an order once a stated level is reached or passed. It is not an undertaking that a trade will occur at that level. When the level is skipped, the resulting order meets the market at the first price available, and the difference between the stated level and the fill is slippage. A limit order behaves the opposite way round: it cannot fill worse than its price, so in a gapping market it may simply not fill at all.

Two assumptions cause trouble. The first is that gapping is a weekend phenomenon confined to foreign exchange. Any market that closes can gap, and a market that stays open can gap when a single event clears the resting orders out of the book. The second is that gapping is inherently adverse. A gap moves in whichever direction the news takes it, and it can open in a position's favour just as readily; the asymmetry sits in the order types, not in the direction of the move.