U.S. stock exchanges will propose doubling the number of companies covered by a two-week-old test of trading curbs and expanding the program to include hundreds of exchange-traded funds, according to two people with direct knowledge of the matter.
NYSE Euronext and Nasdaq OMX Group Inc. will ask the Securities and Exchange Commission to broaden circuit breakers triggered by 10 percent moves to Russell 1000 Index companies from those in the Standard & Poor’s 500 Index, according to the people, who declined to be identified because the information isn’t public. More than 300 ETFs including the SPDR S&P 500 ETF Trust would be covered, one of the people said.
Regulators are seeking to prevent declines in one or more securities from causing panic among investors, prompting a cascade of losses across markets. During the May 6 rout that erased $862 billion in value from U.S. equities in less than 20 minutes, ETFs and companies such as Accenture Plc fell as much as 99 percent. The SEC and Commodity Futures Trading Commission said the plunge may have been fueled by curbs that applied on some venues and not others.
“It makes sense to expand the pilot to ETFs and other stocks traded by a broad universe of investors,” said Edward Johnsen, a partner in the securities regulation practice at law firm Winston & Strawn LLP in New York and former head of equities compliance at Deutsche Bank Securities, a unit of Deutsche Bank AG. “I’d expect the SEC to eventually add all National Market System securities so they’re all covered by the same rule and the same process.”
Securities in the National Market System are companies or ETFs listed on the New York Stock Exchange, NYSE Arca and NYSE Amex -- all owned by NYSE Euronext -- or Nasdaq OMX’s Nasdaq Stock Market. They can be traded on venues including public markets and private platforms known as dark pools.
The SEC is testing the program that pauses trading for 5 minutes in S&P 500 companies when their stock rises or falls at least 10 percent in less than 5 minutes after 9:45 a.m. New York time.
John Heine, a spokesman for the SEC in Washington, declined to comment on the exchanges’ plans for the program, which lasts through December. Eric Ryan, a spokesman at NYSE Euronext, declined to comment, as did Robert Madden of Nasdaq OMX.
The curbs have been triggered once: by Washington Post Co. when it surged 99 percent in less than one second on June 16. The orders, which drove it up to $929.18 from $462.84, prompted a five-minute halt. Later, the trades were canceled. Yesterday, New York-based NYSE Euronext and Nasdaq OMX voided orders that sent shares of Boeing Co., the Chicago-based aircraft maker that’s one of thirty Dow Jones Industrial Average stocks, down 44 percent at 7:14 a.m. New York time.
During the May 6 drop, almost 20,800 trades that were at least 60 percent away from the market price when the plunge began were later canceled. ETFs accounted for 70 percent of the securities with trades on May 6 that were later voided by exchanges. SEC Chairman Mary Schapiro said the SEC would continue to examine trading issues involving ETFs to determine why those securities were among the most affected that day.
CME Group Inc. Chief Executive Officer Craig Donohue said June 22 that curbs on ETFs tracking a large portion of the market could cause dislocations given that their prices are derived from underlying baskets of stocks and are linked to equity-index futures, which may continue trading while the ETF is paused. CME, based in Chicago, runs the world’s biggest futures exchange.
Donohue’s concern highlights the “need for more coordination between instruments that have similar types of exposure to the market but trade in different asset classes,” said Adam Sussman, director of research at Tabb Group LLC, a financial services research firm in New York. “There needs to be coordination so liquidity pressure doesn’t just move from the equities market to the futures market,” he said.
He endorsed the expansion of curbs beyond the S&P 500.
“Most people want to see the circuit breakers more broadly applied so they’re not just for the most liquid stocks but also those that are less liquid,” Sussman said. “Some of the more dramatic price moves on May 6” were by less-traded companies, he added.