To keep 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 as a trial first to all stocks on the Standard and Poor’s Index. The SEC explains that these circuit breakers would stop any stock from trading if it moves a lot more than 10 percent in five minutes. The trial will start 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 and the 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 do not apply at the individual stock level. Reuters reports that regulators and also the exchanges have been under pressure to figure out what actually triggered the May 6 meltdown and do something to repair the integrity of U.S. stock markets. The exact cause of 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. A European news service called Reuters adds that the new NYSE circuit breakers are comparable to stricter methods used in European markets. Circuit breakers at the London Stock Exchange are based upon only on the liquidity and volatility of the individual stocks.
Flash Crash exposes the stub quotes
The stock market Flash Crash on May 6 brought the market down nearly 1,000 points in a matter of hours. Traders might have just been looking for cheap payday 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 even more than the market at large. For a penny or less per share, five exchange traded funds, mutual funds that trade like stocks, were traded for. 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 don’t really want to purchase or sell a stock, but want to stay within the game.
New NYSE circuit breakers more equitable
Thousands of trades in hundreds of stocks were 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 canceled all of the trades that took place between 2:40 and 3 p.m. that were 60 percent or more below the last trade that took place before 2:40 pm. Within the very same exact article, Reuters says that some investors believe the circuit breaker on individual stocks is a a lot 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.”
Other trading curbs considered by SEC
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 involved methods to address the risks of market orders, a ban on so-called stub quotes of one or a couple of cents for a stock that is trading at a higher price, and the use of trading pauses at various exchange.
Read 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
