Stock Circuit Breakers Are Too Long, Not Solution for Bad Trades, ITG Says
U.S. stock trading curbs implemented after the May 6 market crash are almost always being used to correct erroneous trades, a problem for which there is a better solution, according to Investment Technology Group Inc.
Single-stock circuit breakers, mandating a five-minute pause after a stock rises or falls at least 10 percent within five minutes, have been triggered nine times. Yesterday, Nucor Corp. became the eighth company halted under the curbs. Trading in Genzyme Corp. was stopped twice on July 23.
The first Genzyme halt was the only use of the circuit- breaker to allow investors to absorb new information, rather than to correct a bad trade, Jamie Selway, a managing director at ITG in New York, said in a report today. Genzyme, the world’s largest maker of enzyme drugs for rare disorders, surged 15 percent that day on news Sanofi-Aventis SA might buy it.
“Investor protection is important, but our experience the last six months shows this isn’t a particularly effective way to accomplish it,” Selway said in an interview. “There’s an opportunity cost for not offering trading for five minutes.”
The Securities and Exchange Commission asked stock exchanges to impose coordinated halts after the Dow Jones Industrial Average fell as much as 9.2 percent and the Standard & Poor’s 500 Index dropped as much as 8.6 percent on May 6, erasing $862 billion of market value in less than 20 minutes. In effect for S&P 500 stocks since June 11, the pilot program, scheduled to last through Dec. 10, is being expanded to cover Russell 1000 Index companies and 344 exchange-traded funds.
The expansion of the program to companies that are lower- priced and less frequently traded may result in more halts because of erroneous trades, Selway said.
SEC Chairman Mary Schapiro in a speech last week discussed a possible alternative to the circuit breakers that Selway said might be the best way to protect investors.
The approach would halt trading in a stock for 15 or 30 seconds when its price moves up or down by a certain percentage, Selway said. If the sudden price change was sustained, indicating it occurred for a reason and not by accident, the shares could at that point be halted for 5 minutes.