To stay away from another Flash Crash, new circuit breakers for the stock market were suggested by the Securities and Exchange Commission on Tuesday. The new trading curbs would be applied at first as a trial run to all stocks on the Standard and Poor’s Index. . The trial will begin after a 10-day comment period and will end Dec. 10. The proposal is a response to the unexplained market slide May 6 that drove the Dow Jones industrial average down 700 points within just minutes.
NYSE circuit breakers focus on volatile stocks
NYSE circuit breakers that are actually already in place did not trip during the May 6 Flash Crash, but those trading curbs are market-based — they don’t apply at the individual stock level. Reuters reports that regulators and also the exchanges have been under pressure to determine what actually triggered the May 6 meltdown and do something to repair the integrity of U.S. stock markets. The exact reason for the Flash Crash has yet to be determined, but a mechanism to briefly halt trading across markets for a single stock has emerged as a solution. Reuters, a European news service, adds that the new NYSE circuit breakers are similar to stricter methods used in European markets. Circuit breakers at the London Stock Exchange are depending only on the liquidity and volatility of the individual stocks.
Flash Crash exposes stub quotes
In a matter of hours, the stock market Flash Crash on May 6 brought down the market nearly 1,000 points. Traders could have looked for cheap payroll loans, and the Dow soon rebounded, but it finished the day down 347.80, or 3.2 percent, at 10,520.32. According to the New York Times, some individual stocks suffered quite a bit a lot more than the market at large. Five exchange-traded funds — mutual funds that trade like stocks — traded for a penny or less per share. There were also nine a lot more trading at 15 cents or less per stock. Stocks traded hands for a penny a share because of what the SEC calls “stub quotes,” or placeholder bids that traders sometimes enter to the electronic system when they don’t actually want to buy or sell a stock, but still want to stay in the game.
New NYSE circuit breakers a lot more equitable
Thousands of trades had stocks canceled as a result of having been judged as “clearly erroneous,” executed by computer before traders were able to react to what was happening in the market. Market regulators actually canceled any trades that took place between 2:40 and 3 p.m. which were 60 percent or more below the last trade that took place before 2:40 pm. Within the very same article, Reuters explains that some investors think that the circuit breaker on individual stocks is a more equitable approach to prevent drastic, across-the-board trade cancellations.
“The broad market circuit breakers affect everybody, and could penalize people for what could be an index move,” Lou Matrone, a sales trader at JonesTrading, told Reuters. “But the stock-based ones deal with it specifically on a case by case basis. You’re not penalizing people for trading stocks where nothing is really going on, they’re not being dragged in for a ‘fat finger’ problem or some other problem.”
The SEC also considers other trading curbs
During the six-month circuit breaker trial period, the New York Times reports that the SEC will even consider other trading curbs discussed during a recent Congressional inquiry into the May 6 plunge. Those integrated methods to address the risks of market orders, a potential ban on so-called stub quotes of one or a couple of cents for a stock that is trading substantially higher than that, and the use of trading pauses at various exchanges.
Citations
10-day comment period
http://sec.gov/news/press/2010/2010-80.htm
Reuters reports
http://www.reuters.com/article/idUSN1817385520100518
New York Times
http://www.nytimes.com/2010/05/19/business/19crash.html?partner=rss&emc=rss
