Exchanges Said to Seek Three Months for Stock Circuit Breakers
U.S. equity markets are asking for three more months to assess trading curbs for stocks that were implemented after the May 6 plunge, two people with direct knowledge of the discussions said.
Exchanges are working with the Securities and Exchange Commission and Financial Industry Regulatory Authority to update the single-stock circuit breaker program implemented in June for Standard & Poor’s 500 Index companies to include limits on how much prices can swing before trading is halted. The curbs were extended to Russell 1000 Index stocks and more than 300 exchange-traded funds in September. They pause trading across markets in a security for five minutes when it rises or falls at least 10 percent within five minutes.
“The circuit breakers have generally been effective,” said Justin Schack, director of market structure analysis at Rosenblatt Securities Inc. in New York. Updating them to include limits on price moves will halt trading less frequently, he said. “It’s better to prevent erroneous orders than to cancel them after they become erroneous trades,” he said.
The pilot program, which is scheduled to last through Dec. 10, was introduced by U.S. exchanges and Finra after the May 6 stock market crash that briefly erased $862 billion in less than 20 minutes. The circuit breakers operate between 9:45 a.m. and 3:35 p.m. New York time.
Eric Ryan, spokesman for NYSE Euronext, declined to comment, as did Robert Madden at Nasdaq OMX Group Inc. and Stacie Fleming at Bats Global Markets. NYSE and Nasdaq are based in New York and Bats has its headquarters in Kansas City, Missouri. William Karsh, chief operating officer of Direct Edge Holdings Inc. in Jersey City, New Jersey, also declined to comment.
The additional months may give exchanges and regulators more time to alter the existing circuit-breaker program to include a mechanism that prevents trades from occurring above or below certain prices. This limit-up, limit-down system would curb price swings without automatically halting a stock. If that failed to prevent volatility, a trading halt could be triggered.
“They’re probably asking for more time because they haven’t yet figured out how the limit-up, limit-down functionality would work,” Schack said. “The exchanges and regulators have expressed a desire to move forward with that type of mechanism.”
“The existing circuit breakers for individual equities were an essential first step -- but I believe they can be improved,” SEC Chairman Mary Schapiro said in a speech in New York on Sept. 7. “Our next steps are likely to include a careful review of a limit-up, limit-down procedure that would directly prevent trades outside specified parameters, while allowing trading to continue within those parameters.” That would prevent “many anomalous trades,” she said.
Any new program would have to be proposed to the SEC by exchanges. After a public comment period, the SEC would vote on whether to approve it.
“The exchanges and the regulators feel there could be more efficient ways of putting brakes on the market,” said Richard Repetto, a principal at Sandler O’Neill & Partners LP in New York. “It’s widely believed that limit-up and limit-down type circuit breakers that don’t necessarily completely halt trading in an individual stock might be more effective.”
Sixteen stocks have been halted by the circuit breakers including Nicor Inc. today, Intel Corp. on Aug. 27 and Citigroup Inc. on June 29. Four stocks were halted more than once the day the curb was triggered.
“Extending these was a no-brainer,” said Patrick Healy, a former trading executive at Bear Stearns Cos. who now runs Issuer Advisory Group LLC. “If there’s nothing else we learned from May 6, it’s that this kind of protection is essential.” He added that the program should be expanded to more stocks.
“If you’re not a Russell 1000 stock, you have no more protection than you had on May 6,” Healy said. “They need to cover more stocks.”
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