BlackRock's Market Fix: Michael P. Reganby
Would you feel more comfortable if the stock market simply shut down during exceptionally ugly days like we saw at the end of August?
That’s a topic of debate arising from a paper released Wednesday by BlackRock that discusses problems with the U.S. stock market and proffers solutions. Of course, the 16-page report lands on top of a very large stack of previous reports that discussed problems with the stock market and proffered solutions. But this is BlackRock after all, manager of approximately a gazillion dollars in assets, so when it jumps into the market-structure debate, it’s bound to make a big splash.
The knee-jerk reaction for many may be that no, calling a trading halt during brutal declines isn’t going to do any good. Perhaps it will only amplify the panic, causing investors and algorithms to sell as soon as the switch is turned back on. However, BlackRock makes a pretty strong case that it might be the right thing to do, or at least something to consider.
There is, in fact, already a plan in place to shut the whole show down if things get ugly enough. An off switch known as a market-wide circuit breaker would stop trading for 15 minutes if the S&P 500 declines 7 percent. Another 15-minute halt would occur if the drop extends to 13 percent, and a 20 percent drop would stop trading for the rest of the day.
The problem is, the market this summer showed it’s capable of breaking down well before those thresholds. The S&P 500 didn’t fall more than 5.3 percent on the morning of Monday, Aug. 24, but that didn’t stop the wheels from coming off the bus.
According to BlackRock, almost half of the stocks listed on the New York Stock Exchange and a quarter of S&P 500 stocks weren’t trading within 10 minutes of the normal 9:30 a.m. open, and that is a lifetime in a modern market that measures execution times in microseconds. Many stocks that did open on time experienced exaggerated plunges of 20 percent or more. Another major problem is that well-intentioned limit-up/limit-down circuit breakers that stop trading in individual stocks were being triggered left and right on Aug. 24 -- a total of almost 1,300 halts by BlackRock’s count.
It begs the question, what good is a marketwide trading halt at a 7 percent decline in the S&P 500 if a large proportion of the index has stopped trading before then? Those halts and delayed openings mask the true level of ugliness in the market.
So it’s fair enough for BlackRock to suggest that maybe the threshold should be lowered to 3 percent or 5 percent, or that marketwide halts should be triggered if a large portion of stocks aren’t trading. That would likely mean pauses would become more commonplace. And turning a $23 trillion market off during a trading session would come with its own challenges and potential problems. But it could be just what computers and humans need to catch their breath and sort out anomalies during chaotic days.
BlackRock, of course, has a horse in this race and, if you’ll allow a mixed metaphor, there’s an elephant in the room here. And the horse and the elephant are the same animal. Much of the report discusses problems with trading in exchange-traded funds and the difficulties market makers had in matching ETF prices to the values of the stocks they track. BlackRock’s iShares unit offers in the neighborhood of 700 ETFs, far ahead of rivals. There are almost 1,800 ETFs listed in the U.S., according to data compiled by Bloomberg, almost 400 of which are minuscule with assets of less than $10 million.
Most debates about market structure eventually boil down to the notion that the system has grown too complex and needs to be simplified. So that leads to a question that BlackRock didn’t get around to: Do we really need this many ETFs?