August Mayhem Escalated U.S. Stock Exchange Review of Safeguards

  • Rules created after 2010 flash crash get closer inspection
  • One goal is preventing erratic price moves at start of day

Aiming to prevent a repeat of the Aug. 24 turmoil that rocked the U.S. stock market, exchanges are discussing how to strengthen a safety net put in place after the May 2010 flash crash.

Officials have held monthly meetings since the plunge to discuss fine-tuning market protections, according to three people familiar with the discussions, who asked to not be identified because the talks are private. One idea would tighten an existing curb to prevent erratic price moves during the opening minutes of the day, which could have mitigated losses on Aug. 24.

The rout included brief 21 percent plunges by high-profile stocks JPMorgan Chase & Co. and General Electric Co., trouble getting hundreds of securities trading and disruptions with many exchange-traded funds. This showed safeguards meant to prevent sudden, inexplicable lurches in the $23 trillion U.S. stock market may need adjustment.

“The last major market volatility event was May 2010, and this was our opportunity to analyze what we’ve put in place,” Stacey Cunningham, chief operating officer of NYSE Group, said in an interview.

Participants in the talks include representatives from the New York Stock Exchange, Nasdaq Inc., Bats Global Markets Inc., and the Financial Industry Regulatory Authority, which is Wall Street’s self-regulator. The group had been meeting before the August plunge to discuss existing safeguards, but the gatherings have become more frequent since that day, said the people.

Any proposals would need approval from the U.S. Securities and Exchange Commission to take effect.

Representatives of Bats, Nasdaq, Finra and the SEC declined to comment.

Flash Crash

After the flash crash, the U.S. stock market got a system called limit-up/limit-down, which prevents stocks from trading outside predictable price bands. But those bands are wider during the first 15 minutes of the day -- which is when things went haywire on Aug. 24 -- as well as the final 25 minutes.

BlackRock report shows KKR plummeted in the opening minutes of Aug. 24.
BlackRock report shows KKR plummeted in the opening minutes of Aug. 24.
Source: BlackRock

Exchanges are discussing whether to make the bands uniform throughout the day, according to people familiar with the matter. That could have prevented, or at least reduced, the large temporary losses in stocks such as JPMorgan and GE.

“There’s a big foment going on in the industry about what did we see on Aug. 24 and what can we do to prevent a recurrence," said Jim Angel, a finance professor at Georgetown University in Washington who drafted a new report for the committee on how exchange-traded funds behaved that day.

Fewer Halts

The group already proposed an amendment in October that is awaiting SEC approval, which would modify the reference price used to set the price bands on stocks that open without trading. The protection is expected to reduce unnecessary trading halts that occur when there is no trading by 80 percent, according to the exchange group.

Exchange rules faced heightened scrutiny from asset managers and other market participants after Aug. 24. BlackRock Inc., the world’s largest asset manager, proposed shutting the whole stock market if a certain percentage of stocks are halted. That was part of the trouble that day: Market makers had difficulty getting many stocks trading, which disrupted the ETFs that owned them.

ETFs experienced particular difficulties that day as the prices of their underlying stocks swung wildly. Of the 1,278 occasions a security was paused for 5 minutes or more on Aug. 24, according to NYSE, 999 of the halts were on NYSE Arca, which lists more exchange-traded funds than any other market.

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