U.S. Stock Exchanges Propose New Rules to Increase Resiliency Following Halts

The move comes after market makers and money managers took the matter up with the SEC in March.

On Thursday, the top three U.S. stock exchange groups, Bats Global Markets (Bats), Nasdaq and the New York Stock Exchange (NYSE), announced a collaborative effort to harmonize key functions of the U.S. equity markets in a bid to increase resiliency during times of extreme volatility.

Proposed rule changes will be submitted to regulators in the coming weeks, and it aims at harmonizing the way stocks and ETFs are halted and reopened in volatile trading sessions. The major operators are also working on improving the price discovery process after the stocks come out of a trading pause. The system the exchanges are addressing is called Limit Up-Limit Down (LULD).

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The LULD rule was approved on a pilot basis by the SEC in 2012 and is designed to prevent trades in individual securities outside of specified price bands (LULD Bands).

A unified process

In March, a group nearly 20 financial firms wrote to the U.S. Securities and Exchange Commission asking the regulator to outline new steps or revise existing rules. Without adjustments, “we are concerned that the markets are susceptible to a similar event occurring at any time,” the group cautioned.

BlackRock Inc., Vanguard Group Inc. and State Street Corp. were among a group that pushed the U.S. Securities and Exchange Commission to improve the trading halt system in a March letter.

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The three firms welcomed the coordinated step in a separate statement, saying: “We look forward to the accelerated implementation of the new reopening procedures, and the continued progress by the exchanges and the industry to address the other key areas outlined in our letter.”

The proposal comes nearly a year after a wild trading session on Aug. 24, 2015, in which the Dow Jones Industrial Average briefly plunged more than 1,000 points. Seized by mounting worries over instability in China, investors raced into safe-haven assets and sold equities with abandon at the opening bell which sent the Dow down almost 1,100 points, the biggest decline on record in a trading day. Then the market staged a dramatic comeback and almost erased its losses, but later tumbled again and the Dow finished the day down 588 points, or 3.6 percent.

Four goals

According to the statement, the exchanges want to address four key goals:

  • Eliminating the time periods where securities could trade without LULD Bands in place;
  • Reducing the number of Trading Pauses;
  • Standardization of primary exchange automated re-openings following a Trading Pause; and,
  • Elimination of Clearly Erroneous Execution (CEE) rules when LULD Bands are in effect.

Additionally, the exchanges are currently conducting further data-driven analysis, and are considering market participant feedback to recommend changes or elimination of CEE rules.

Representatives for the exchanges have also said that each exchange group has implemented its own initiatives to improve the stability and resiliency of their respective markets.

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