U.S. stock exchanges and the Financial Industry Regulatory Authority, which oversees almost 4,300 brokers, introduced curbs for individual stocks after the flash crash to halt shares when they rise or fall at least 10% in five minutes. The new system is likely to cause fewer halts, the SEC said last year.
The so-called single-stock circuit breakers were triggered 550 times between June 2010 and December 2012, according to a March 27 report by Ana Avramovic, a New York-based analyst in Credit Suisse Group AG’s trading-strategy unit. Of these, 51% were stops in very illiquid or cheap stocks, 40% were driven by news about the company and 6 percent were caused by what are called fat-finger events or accidental trades. Only 4% were triggered by a single bad transaction, and with the new initiative “we would expect that percentage to decline,” Avramovic wrote.
The percentage a stock can move is determined by its closing price the previous day. S&P 500 stocks that are more than $3, for example, can move 5% above and below their rolling average price. The range is bigger for cheaper stocks.
The plan also gives the market that lists a security the discretion to declare a trading pause when a stock has “deviated from its normal trading characteristics” and the exchange decides that a halt would curtail excessive volatility, the SEC said. That will ensure a company’s shares don’t “remain impaired” indefinitely, it said.
Testing for the volatility-reducing programs occurred on several Saturdays and included broker-dealers, all market centers and the so-called securities information processors that disseminate data, Louis Pastina, executive vice president for market operations at the New York Stock Exchange, said by phone. The tests were scripted to trigger events such as limit states and halts so firms could ensure they can handle the data properly, he said.
Phasing in the new curbs “gives the industry time to digest this in small bites until later in the summer when all stocks will be included,” Pastina said.
NYSE and NYSE MKT, the exchange operator’s platform for smaller companies, are ending their liquidity replenishment points, or automated curbs that pause trading only on those markets, as the new curbs are installed for specific stocks. LRPs, introduced as a safeguard when NYSE converted to a more fully electronic exchange about half a dozen years ago, are being ended after the SEC told the company to eliminate them to avoid confusion once the new brakes are in place.
NYSE canceled no trades during the flash crash on May 6, 2010, while other exchanges voided more than 20,000 transactions totaling 5.5 million shares, according to a report by the SEC and Commodity Futures Trading Commission in October 2010. More than 1,000 companies triggered LRPs lasting more than a second between 2:30 p.m. and 3 p.m. on May 6, compared with 20 to 30 on most days, the report said. Some exchange and brokerage executives said NYSE’s actions may have caused liquidity to move to other venues and created confusion in the market.