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 start after a 10-day comment period and will last through 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.
Volatile stocks the focus of NYSE circuit breakers
NYSE circuit breakers 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 are under pressure to determine what really 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 is supposedly solution. Reuters, a European news service, explains that the new NYSE circuit breakers are very similar to stricter methods used in European markets. Circuit breakers at the London Stock Exchange are based on the liquidity and volatility of individual stocks.
Flash Crash exposes stub quotes
The stock market Flash Crash on May 6 brought the market down nearly 1,000 points in a matter of hours. Traders may have started looking for cheap paycheck loans, and also the Dow soon rebounded, but it finished the day down 347.80, or 3.2 percent, at 10,520.32. As outlined by the New York Times, some individual stocks suffered quite a bit than the market at large. Five exchange traded funds which are mutual funds that trade like stock, were down to a penny or less per share. There were nine others trading at 15 cents or less. 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 do not actually want to buy or sell a stock, but nevertheless want to stay in the game.
A lot more equitable are the new NYSE circuit breakers
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 within the market. Market regulators 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. In the same article, Reuters reports that some investors believe 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.”
SEC considers other trading curbs
During the six-month circuit breaker trial period, the New York Times reports the SEC will also consider other trading curbs that ended up being discussed during a recent Congressional inquiry to the May 6 disaster. Those included solutions to address the risks of market orders, a ban on so-called stub quotes of one or a few cents for a stock that is trading at a higher price, and also the use of trading pauses at various exchange.
Read a lot more on this topic here
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
