Trading was briefly halted today in about 40 exchange-traded funds and notes when the securities were added to a program aimed at curbing sudden price swings.
Most of the ETNs and ETFs trade so seldom that there probably wouldn’t have been any transactions even if they hadn’t been halted, data compiled by Bloomberg show. They were set off during implementation of the protocol known as limit up/limit down that pauses securities when bid-ask spreads become too wide, according to NYSE Euronext.
“It is typical for small stocks that don’t trade very often to have very wide spreads,” James Angel, a finance professor at Georgetown University’s business school in Washington, said in a telephone interview. Market makers “are not going to quote a narrow spread because they’re going to have trouble trading out of the position,” he said.
Exchanges have occasionally urged regulators to slow the adoption of limit up/limit down, which replaces the old price-based system of halts known as circuit breakers, so that its effect on trading can be studied. Regulators have sought ways of reducing swings in securities since the May 2010 flash crash that briefly sent the Dow Jones Industrial Average down almost 1,000 points.
“The rollout of limit-up/limit-down is in its initial phase” for ETFs and ETNs, Katrina Clay, an NYSE spokeswoman, wrote in an e-mail today. “We will continue to work within established guidelines, and explore with regulators and other markets to address this and other market structure issues going forward.”
The securities were listed on NYSE Arca and halted between 9:30 and 10:30 a.m. in New York today. Among them, the ProShares German Sovereign/Sub-Sovereign ETF, tracking the performance of a gauge of German government debt, traded an average of 528 shares a day this year, according to data compiled by Bloomberg. The AdvisorShare Pring Turner Business Cycle ETF is an asset allocation fund with about 2,500 shares changing hands each day.
The old system of circuit breakers halted trading for five minutes when the price of a stock or ETF moved 10 percent in five minutes.
Under the limit-up/limit-down system, trades aren’t 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 declares a trading pause of five minutes.