U.S. Trading Curbs Cause Few Disruptions, Credit Suisse Says

The trading pauses used to curb volatility in U.S. equities since June 2010 are working as planned and rarely disrupt trading, according to a study by Credit Suisse Group AG.

Circuit breakers adopted after the May 6, 2010, plunge that erased almost 1,000 points from the Dow Jones Industrial Average were deployed 111 times through last month, Credit Suisse said. Stocks were halted 56 times after news on takeovers, litigation and other events. The rest fell into three categories: trading in illiquid or low-priced stocks; “fat finger” orders that were mistakenly placed at prices far from previous levels or for more shares than intended; and single “bad prints.”

Advisers to the Securities and Exchange Commission and Commodity Futures Trading Commission said in February that the five-minute halts had been “particularly problematic” in cases where a single trade prompted the pause. Credit Suisse found that happened 6.3 percent of the time.

“Only a few occurrences could be considered truly disruptive,” Ana Avramovic, a New York-based analyst at Credit Suisse and author of the report, wrote in a report yesterday. “The vast majority were a nuisance at worse.”

Credit Suisse said 12 circuit breakers were caused by fat-finger trades that spurred a flurry of transactions far from previous prices, seven by a single order and 36 involved stocks that didn’t trade actively or that were priced below $1.

May 2010

Trades resulting from fat-finger errors are “arguably what you really want to catch” before they happen since they may influence other buying or selling activity, Dan Mathisson, New York-based managing director and head of Credit Suisse’s Advanced Execution Services group, said at a Security Traders Association conference in West Palm Beach, Florida, on Oct. 14.

The type of halt that “angers traders” is the bad print, Mathisson said. These events unnecessarily provoke halts even though they don’t lead to trading that causes prices to rise or fall, he said.

The halting mechanism was adopted by U.S. exchanges after the so-called flash crash on May 6, 2010, to prevent rapid price moves in individual securities and help prevent a chain reaction that drives the entire market lower.

The system halts stocks in the Standard & Poor’s 500 Index and Russell 1000 Index as well as about 350 exchange-traded funds after they rise or fall at least 10 percent within five minutes. Other stocks and ETFs are allowed to move more before a halt starts. The pause lasts five minutes.

Prior Curbs

Before the curbs were created last year, exchanges already had a system in place for companies to halt their stocks before they released market-moving information.

The new circuit breakers for individual stocks “cannot be considered out of line given the well-established pending-news halts,” Avramovic said. “The circuit breaker effectively replicates what regulatory halts are already meant to do anyway, but haven’t had the advanced warning to be able to.”

The New York Stock Exchange, Nasdaq Stock Market and other venues are working with regulators to move to a limit-up/limit-down mechanism that prevents trades outside a moving price band based on a security’s average level during the previous five minutes. The SEC announced the joint proposal by the exchanges and the Financial Industry Regulatory Authority in April.

New Limit

James Brigagliano, former deputy director of the SEC’s division of trading and markets, said at the Florida conference that he expects the exchanges and regulators to finalize the limit-up/limit-down plan by Nov. 28. Brigagliano left the agency after more than two decades last month to join law firm Sidley Austin LLP.

The new program to curtail volatility will also include a provision that halts stocks, like the current circuit-breaker system. If a stock price rises or falls to the threshold and trades are “unable to occur within the price band for more than 15 seconds,” a five-minute pause will be imposed, according to the SEC. The halt will give investors time to respond to “fundamental price moves” driven by news about a company’s shares, while avoiding many halts, the SEC said.

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