Price band limits to curb U.S. stock volatility starting today

A three-year effort to fine-tune curbs on volatility for individual stocks enters a new phase today in the U.S.

Trying to reduce market disruptions, regulators are instituting a plan that creates price bands in which shares are allowed to trade on American equity exchanges, replacing the old system of immediate pauses when shares swing rapidly. New restraints to halt all U.S. stock, options and index futures when the Standard & Poor’s 500 Index plunges will also take effect. Both will operate as one-year pilot programs.

Regulators and exchanges are altering the speed bumps adopted after the May 2010 flash crash to boost confidence in a market that has become faster and more complex over the last decade. While replacing automatic halts with the new system known as limit-up/limit-down is “the right answer,” getting ready for it hasn’t been easy for broker-dealers, according to Chris Concannon, a partner at electronic market-maker Virtu Financial LLC in New York.

“It adds more complexity,” Concannon said. “It sounds simple, but for firms managing thousands of customer orders, you have to program how you’ll manage them, how you’ll deal with quotes and trades across 50 destinations, routing decisions and execution quality.”

Under limit-up/limit-down, trades won’t be permitted to occur more than a specified percentage above or below a stock’s rolling five-minute average price. If the lowest price at which investors are willing to sell shares reaches the stock’s lower band, or the highest purchase price reaches the higher band, the stock enters a so-called limit state for 15 seconds. Should no trades occur between the bands, trading will cease for five minutes, according to the U.S. Securities and Exchange Commission.

Gradual Adoption

More than two dozen companies listed on exchanges owned by NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets Inc. will adopt the new trading bands today. More will join each week through mid-May until all S&P 500 and Russell 1000 Index corporations and more than 400 exchange-traded products are included in the revised program.

The curbs will operate from 9:45 a.m. to 3:30 p.m. New York time. Other securities will be added in August, when the program will also run the full day from 9:30 a.m. until 4 p.m.

“There’s going to be some hiccups,” Adam Sussman, director of research at consulting firm Tabb Group LLC in New York, said in a phone interview. “Where it’s going to get tricky for brokers is how they handle responses to when a stock is in a limit state.”

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