Nearly a year after a wild trading session on August 24, 2015, led to more than 1,000 stock and exchange-traded fund halts in a single day, NYSE Group, a unit of Intercontinental Exchange, Nasdaq and Bats Global Markets outlined a series of planned measures on August 11 aimed at smoothing trading activity. Among the moves will be a unified process by which stocks and ETFs resume trading after a halt.
Trading venues currently have different systems for dealing with the resumption of trading, a factor some market participants argued exacerbated the market swing a summer ago.
Critics of the exchanges’ current procedures include a host of money managers and market-makers, who wrote to the US Securities and Exchange Commission in March asking the regulator to outline new steps or revise existing rules. “The industry continues to make progress on these issues, and we look forward to reviewing the exchanges’ filing,” an SEC spokeswoman said on August 11.
Representatives for the exchanges have also said broader changes to equity-market circuit-breakers are needed and will now attempt to address both issues themselves. The steps mark an unusual example of exchanges – which compete for stock and other listings – agreeing to implement common measures without a regulatory mandate. On August 11, the three exchange groups said in the coming weeks they will file with the SEC a set of exchange rules as well as an update for the current “limit-up/limit-down” circuit-breaker model.
The exchanges didn’t disclose exactly what the new policies are going to be.
“Limit-up/limit-down” circuit-breakers were introduced following the so-called flash crash on May 6, 2010, when the Dow Jones Industrial Average dropped 700 points in eight minutes before recouping much of the loss. They aim to keep stocks from moving too quickly out of certain price bands by allowing investors to continue buying and selling stocks within certain parameters, while stopping trades outside those limits.
In the past year, the exchanges have changed how the “limit-up/limit-down” model works at the start of trading. It now uses the previous day’s closing price as the reference price at the market open when no opening price is available on the primary exchange.
In their statement, the exchanges said the changes have helped reduce “limit-up/limit-down” trading pauses. They added that they will soon be submitting to the SEC changes to the “limit-up/limit-down” plan that will help align parameters for the price discovery process after a trading pause is triggered.
The “limit-up/limit-down” came under fire after August 24, 2015, when industry observers said the trading halts exacerbated market dislocations by keeping prices from quickly returning to their proper levels or forcing ETFs to trade at large discounts to their net asset values.
Concerns about trading halts and subsequent resumptions were highlighted in the March letter.
“Absent these changes, especially with the volatility in the current equity markets, we are concerned that the markets are susceptible to a similar event occurring at any time,” the letter said.
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This story was first published by The Wall Street Journal