NYSE Arca Rules Partly Responsible for August ETF Rout, SEC Saysby
Agency's report says price bands slowed ETFs from rebounding
Exchange safeguards put in place to help prevent flash crashes
A bout of market mayhem that halted trading in hundreds of exchange-traded funds in August was exacerbated by stock exchange rules intended to limit extreme price movements, according to a U.S. regulator’s report released Tuesday.
The Securities and Exchange Commission’s analysis of the events on Aug. 24 said price bands imposed by exchange NYSE Arca restricted how quickly ETFs could rebound after steep price declines triggered halts. Arca’s narrow bands, which it has since proposed to widen, may have spurred more delays by limiting faster price adjustments, the regulator’s report said.
The 88-page study, which was issued by the SEC’s staff and didn’t propose any policy fixes, gives the agency’s commissioners and industry groups a blueprint for debating structural changes to stock and ETF trading. The analysis cited multiple factors that contributed to the volatility, including the use of orders that execute at the prevailing market price, no matter how far prices rise or fall. These so-called market orders contributed to an excess of selling, which helped further push down prices, the SEC said.
Regulators and stock exchange officials continue to discuss changes that could minimize the likelihood of another event like the August turmoil that caused more than 1,000 trading halts in 327 exchange-traded products. The focus is on how to tweak safeguards put in place after the May 2010 flash crash, when prices for more than 300 securities varied by more than 60 percent. The protections, known as “limit-up, limit-down,” cause trading to be halted when prices increase or decrease by a certain threshold.
Sara Cohen, a NYSE spokeswoman, declined to comment on the report.
Some ETF providers have said pricing was disrupted in August because many NYSE-listed stocks didn’t trade until after that market’s scheduled 9:30 a.m. opening. Some NYSE listed stocks opened late that day as market makers struggled to make sense of erratic price quotes.
ETFs tied to NYSE-listed stocks weren’t alone in falling much more than they shares they track. The same thing happened to the Powershares QQQ Trust Series 1, an ETF that follows the performance of the Nasdaq 100 Index. Nasdaq-listed stocks opened at 9:30 a.m. on Aug. 24 without delay.
The regulator’s report is likely to be analyzed by members of an SEC advisory committee that includes representatives of Bats Global Markets Inc., Barclays Plc, Citadel Securities LLC, and IEX Group Inc. The SEC’s equity market structure committee could use the report’s data to recommend policy changes to the commission.
The Investment Company Institute, which represents mutual fund and ETF companies, said it would closely review the SEC’s analysis.
“As ICI has stated previously, those events are largely related to market structure and trading issues, not to the characteristics of ETFs,” ICI spokesman Mike McNamee said in a statement.