New curbs to limit rapid price moves in individual stocks and changes to rules designed to prevent market-wide routs may be delayed two months to April, according to exchange operator Bats Global Markets Inc.
The shift from circuit breakers that pause trading if a stock rises or falls 10 percent in five minutes to curbs that limit moves without automatically triggering a halt will take effect April 8 instead of Feb. 4, subject to regulatory approval, the Lenexa, Kansas-based company said in a notice on its website. Changes to an existing program that stops all equity-based trading across stocks, options and futures will also be delayed, Bats said in the statement.
Both measures are meant to protect investors from extreme price moves. The gauge that will trigger the market-wide circuit breakers is switching from the Dow Jones Industrial Average to the Standard & Poor’s 500 Index, while the price drop for trading to stop is being narrowed and the length of pauses shortened in most cases. The so-called limit-up/limit-down plan, which prevents individual stocks from moving outside a rolling price band, will replace the automatic halts implemented after the flash crash on May 6, 2010, when the 30-stock Dow average briefly fell 9.2 percent.
“Sifma has been supportive of the limit-up/limit-down plan, and the plan should promote investor confidence,” T.R. Lazo, managing director and associate general counsel of the Securities Industry and Financial Markets Association, which represents banks, brokers and asset managers, said in an e-mail. “Because the plan is such an important market development, our member firms want to make sure they have sufficient time to test the necessary systems and coding changes so that the implementation is successful.”
The trade group said “substantial operational and interpretive issues” must be addressed before the individual-stock curbs can be implemented, according to a Nov. 30 letter to the U.S. Securities and Exchange Commission. Not enough information is available to brokers to make the software code changes that are necessary, it said.
“Proceeding with the current implementation schedule would create a great deal of risk, as well as a situation in which firms are required to implement significant systems and coding changes without sufficient time to conduct testing,” it said.
SEC OK Needed
The SEC must approve the request to delay implementation of the limit-up/limit-down plan by the 13 stock exchanges and Financial Industry Regulatory Authority, which oversees more than 4,300 brokers, for it to go into effect. A separate delay request would have to be submitted by securities exchanges and Finra for the market-wide circuit breakers, introduced after the October 1987 market crash.
John Nester, a spokesman for the SEC, declined to comment. Also declining comment were Keara Everdell, a spokeswoman for NYSE Euronext, Robert Madden of Nasdaq OMX Group Inc. and Jim Gorman at Direct Edge Holdings LLC. Dow Jones reported the planned delay yesterday.
The Financial Information Forum, a group of brokers, exchanges and vendors, asked the SEC in a Dec. 13 letter to delay the start of both price curbs to late March to give market participants more time to write the necessary computer code and test their systems. This was done to reduce systemic risk and safeguard the market by trying out the individual-stock program with test or fake security symbols before it’s implemented, according to Manisha Kimmel, executive director of the group.
“We were concerned about the timing of this whole process,” Kimmel said in a phone interview. “We said we should use test symbols in production to be consistent with the SEC’s roundtable on market technology, and do more testing to reduce systemic risk. This affects market data, order-routing systems, trading systems at exchanges and broker-dealers.”
The limit-up/limit-down plan prevents certain stocks with a previous closing price higher than $3 from moving more than 5 percent from their average price over the previous five minutes. If prices rise or fall the maximum amount they will enter a 15-second so-called limit state to allow the market to correct itself. If prices recover, trading continues. If not, the market will stop trading the security for five minutes, as is currently the case for extreme price moves.
The new rules for individual stocks will be introduced gradually, first for components of the S&P 500, Russell 1000 Index and a group of about 430 exchange-traded products, and later for all those listed on exchanges, according to the SEC. Securities with prices up to $3 and those not in the initial group will have larger trading bands under the planned curbs. Changes to these volatility restrictions were proposed to avoid halting a stock when prices move rapidly because of errant activity, according to the exchanges and SEC.
FIF held three conference calls, each with more than 100 attendees, to discuss changes to the plan for individual stocks in November and December, Kimmel said. The group is a subsidiary of New York-based Jordan & Jordan, which specializes in securities industry information and compliance issues.
The exchanges are also working to update their own rules for the limit-up/limit-down plan, Kimmel said. These changes will specify how orders are treated when the market is in a so-called limit state and how equity and options exchanges will handle buy and sell requests at that time to ensure consistency and reduce confusion among investors and brokers, she said. These rules should be available to individuals writing software code before testing of the new regulation starts, she said.
The current single-stock circuit breakers would continue until the new start date for the limit-up/limit-down plan, according to Bats. On Feb. 4, the existing curbs would be changed to start at 9:30 a.m. New York time instead of 9:45 a.m. and would end at 3:50 p.m. instead of 3:35 p.m. so they cover more of the trading day, Bats said.