From the August 01, 2010 issue of Futures Magazine • Subscribe!

Flash crash rules pause stocks

imageSince the initial introduction of the single stock circuit breakers on June 10 by the Securities and Exchange Commission (SEC) in response to the May 6 flash crash, three stocks have been paused under the new rules.

The Commodity Futures Trading Commission (CFTC) and the SEC hosted multiple meetings to get to the bottom of the flash crash when the Dow dropped about 1,000 points and rebounded in a 20 minute span. More disturbingly, several individual stocks dropped to a penny and trades were later busted.

The SEC has since released plans to expand its single stock circuit breaker trial that initially only included stocks in the S&P 500 to also include stocks in the Russell 1000. With these circuit breakers, trading will be paused for five minutes on any monitored stock that moves 10% in a five minute period.

The first stock paused was Washington Post Company, triggered on June 16 after three trades were posted at nearly twice the previous price. The trades were eventually busted and trading resumed following the five minute pause slightly lower than before the halt.

The second to be halted was Citigroup on June 29 (see Chartview) after a trade for 8,821 shares at $3.3174 was posted, 12.7% away from the previous trade. Again, the trade was later busted.

Finally, Andarko Petroleum Corp. was halted on July 6 when 200 trades went through at NYSE Arca for $100,000, well above the prior trade at $39.14.

Already, some are wary of the unforeseen consequences of the circuit breakers as the rules are currently written. “The system needs to be tweaked. If one trade can halt a stock, it doesn’t seem like a good system. You can’t halt a stock because of an error and because anybody can print a trade on a TRF [trade reporting facility] there will be errors. If someone were to have malicious intent it would be very easy for them to halt trading,” says Joseph Saluzzi, co-head of equity trading at Themis Trading.

Jay Gould, head of the investment funds practice at Pillsbury, reminds traders, though, that, “Market manipulation is illegal. It may take the SEC a while to get their arms around a specific event, whether that is six months or longer, but I would not attempt to manipulate the circuit breaker provisions and think that enforcement action would not be forthcoming.”

An SEC spokesman declined to comment on either the effectiveness of the single stock circuit breakers or the possibility of traders using them to their advantage.

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