Exchanges Propose Adjustments to U.S. Trading-Curb System
U.S. stock exchanges proposed changes to trading curbs meant to safeguard equity markets, revising an April 2011 proposal for a system that would prevent trades at prices outside a certain band.
The curbs would give markets that list companies and exchange-traded funds new flexibility to pause stocks when doing so may damp volatility, according to a Securities and Exchange Commission filing dated May 24 from venue operators including NYSE Euronext and Nasdaq OMX Group Inc. (NDAQ) The system would be implemented in February as a one-year pilot program, said the group, which includes the Financial Industry Regulatory Authority, overseer of more than 4,400 brokers.
Regulators and exchanges introduced curbs after the May 2010 rout known as the flash crash to halt individual stocks when they rise or fall at least 10 percent. Exchanges asked for permission 13 months ago to test a replacement system known as limit-up/limit-down, and the May 24 filing augmented that request in response to comments from brokers and other market participants. The 2011 proposal was never implemented.
“The plan will reduce the negative impacts of sudden, unanticipated price movements in NMS stocks, thereby protecting investors and promoting a fair and orderly market,” the exchanges and Finra wrote, using the acronym for national market system.
The SEC must approve the filing before it can be implemented. The regulator must make a decision by May 31, according to an SEC notice when a ruling was last delayed.
The proposal would affect trading on all exchanges including those run by NYSE Euronext (NYX), Nasdaq OMX, Bats Global Markets Inc. and Direct Edge Holdings LLC, as well as private venues such as dark pools and brokerages that execute orders within their own walls.
The current system of circuit breakers halts trading for five minutes when the price of a stock or ETF moves 10 percent in five minutes. The new plan would instead allow transactions to occur away from the security’s average price without automatically preventing shares from changing hands, and would halt trading only if activity doesn’t seem likely to moderate.
The proposal would give the market that lists a security the discretion to declare a trading pause when a stock “deviates from normal trading characteristics” and the exchange decides that a halt would curtail excessive volatility. The April 2011 proposal didn’t include this flexibility, and instead limited the range of prices at which executions were allowed to occur.
Under the limit-up/limit-down system, trades wouldn’t be allowed to take place more than a specified percentage above or below the average price over the preceding five-minute period. If prices don’t move away from the specified limits within 15 seconds, the listing market would declare a trading pause of five minutes.
Each stock will be allowed to move a certain percentage above or below its five-minute average, with the amount varying depending on its closing price the prior day. The price band will be 5 percent above and below for stocks that are at least $3, according to the proposal. Those between 75 cents and $3 can move up to 20 percent, while those less than 75 cents can move the lesser of 75 percent or 15 cents.
The plan will be implemented in two phases. The system will initially apply to stocks in the Standard & Poor’s 500 Index (SPX), Russell 1000 Index and a group of about 430 exchange-traded products, with price bands calculated from 9:45 a.m. New York time until 3:30 p.m. The second phase, which will start six months later, will operate from the start of trading at 9:30 a.m. until the close at 4 p.m. and apply to all stocks and exchange-traded products in the U.S., the proposal said.
The exchanges and Finra proposed an advisory committee to provide comments and views about proposed changes to the plan. That group will include representatives from a broker with retail customers, a securities firm with institutional clients, an alternative trading platform such as a dark pool, and an investor. Dark pools are private venues run by brokers that match buy and sell requests and often compete with exchanges.
Decisions to change the limit-up/limit-down program will be made by an operating committee that includes a member from each of the exchanges and Finra, the proposal said.
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