Single-Stock Circuit Breaker Introduction Is Postponed by SEC
Circuit breakers to slow trading in Standard & Poor’s 500 Index (SPX) stocks during periods of volatility will be delayed for at least a week, according to the U.S. Securities and Exchange Commission.
Regulators asked exchanges to impose coordinated halts following the May 6 rout that erased $862 billion from U.S. equities in less than 20 minutes. Securities executives proposed methods on May 18 to pause trading across markets when a stock in the S&P 500, the benchmark index for U.S. equities, rises or falls 10 percent in five minutes.
The SEC said yesterday that a pilot program for the circuit breakers will begin within two weeks, according to an e-mailed statement. NYSE Euronext said it wouldn’t start its trial of the system on June 7 because it hadn’t received SEC authorization. Nasdaq (NDAQ) OMX Group Inc., based in New York, is prepared to introduce circuit breakers on the S&P 500 companies it lists on June 14, pending SEC approval, spokesman Robert Madden said.
“The majority of work needed on the circuit breaker needed to be done by the listing exchanges,” said William Karsh, chief operating officer of Direct Edge Holdings LLC in Jersey City, New Jersey. His firm is converting two U.S. trading stock venues into exchanges. “We’re prepared to go forward as soon as they are,” he said.
Trading in a stock will be paused for five minutes when the 10 percent threshold is triggered. The plan supplements existing rules, including a market-wide halt when the Dow Jones Industrial Average falls 10 percent from the previous day’s closing price.
The SEC said its staff is reviewing public comments about the program and will present the proposals to the commission next week. Circuit breakers will be introduced a week after they’re approved, the agency said yesterday.
Credit Suisse Group AG (CS)’s Dan Mathisson said the circuit breakers should be broadened to more stocks and operate throughout the day. They should also lead to a 10-minute halt in trading instead of a 5-minute pause, according to a letter the Zurich-based firm sent the SEC yesterday.
“We think a 10-minute halt would be a reasonable compromise: long enough to allow humans time to make rational decisions, while still short enough to avoid overly disrupting the markets,” Mathisson wrote. Less than that wouldn’t give investors enough time to conduct “meaningful analysis and understand the reasons behind a sudden price drop, and then make a rational decision to buy or sell,” he said.
James Angel, a professor at Washington-based Georgetown University and an expert on the structure of markets, told the SEC on May 25 that more regulation is needed to prevent plunges.
“We need a contingency plan for how to handle the simultaneous tripping of circuit breakers in hundreds or even thousands of stocks,” he said in a letter. “Under such disorderly conditions, it is unlikely that the market will be discovering the correct prices.” He recommended a 15-minute pause in all trading if 10 or more stocks in the Dow average or 50 in the S&P 500 rise or fall a certain amount.
Nasdaq’s chief executive officer said yesterday that equities and derivatives exchanges in the U.S. need to adopt the same trading curbs in response to last month’s plunge.
“We believe there should be one set of unified circuit breakers,” Robert Greifeld, the chief executive officer of Nasdaq, told reporters in New York yesterday. “That uniform set of circuit breakers shouldn’t be just in the cash markets but should include futures markets.”
Greifeld said uncertainty about what venues including CME Group Inc. (CME)’s Chicago Mercantile Exchange, the world’s largest futures market, will do when prices swing should be eliminated. CME is regulated by the Commodity Futures Trading Commission, not the SEC.
Nasdaq said on June 2 that it would also introduce a mechanism to pause trading in all companies listed on its market if shares rise or fall a set amount in 30 seconds. The program, to begin in the third quarter, would only apply on the Nasdaq Stock Market. The shares could continue to trade elsewhere.
NYSE Euronext’s New York Stock Exchange has had a system known as liquidity replenishment points in place since 2006 that slows trading if a stock moves rapidly. NYSE holds automated auctions to gather buy and sell orders and determine a price based on that demand. These auctions can take place in less than a second or after trading has paused for half a minute or more.
“We have to think first and foremost about our issuers,” Greifeld said. Companies want assurance that the prices of their shares are not arbitrary or unrelated to the value of the firms, he said. Nasdaq will end the pause after one minute.
Greifeld also said his firm plans to modify rules to eliminate stub quotes, which are bids and offers that some have blamed for exacerbating the May 6 plunge in U.S. stocks.
Some stocks fell to pennies that day as sell orders executed against stub quotes. Brokers can set those as low as a 1 cent a share because they’re never expected to be used. Nasdaq canceled about 12,300 trades from 2:40 p.m. to 3 p.m. on May 6, or 59.3 percent of the total number of voided transactions across markets. NYSE, which already had volatility curbs in place, voided no trades.
The goal over the “short term is to have stub quotes be replaced by quotes that are realistically priced to the market at the time,” Greifeld said. Companies such as Accenture Plc (ACN) traded for 1 cent on May 6. One way to avoid this could be to require market makers to quote “within 15 percent of the market,” he said.
Some brokers and algorithms send orders into the market that shouldn’t have been submitted on May 6, he said. These included “dumb sell-short orders” and other requests to sell shares at a “dumb price,” he said.
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