Friday, May 14, 2010

Breaking News: What the SEC's New Individual Stock Curbs Might Look Like

This isn't cast in stone yet, but I'm told that starting Monday, a pilot program will be filed requiring all exchanges to apply new rules to S&P 500 stocks and select active ETFs, designed to prevent a rehash of Thursday May 6th's extreme price action.

Trading in each stock will be monitored by the exchange it's listed on.  Curbs will be triggered when there is a 10% decline (or advance) in any rolling 5 minute period between 9:45am and 3:30pm.  If the curb is triggered, the listing exchange will send out a message, and trading will be "paused" for 5 minutes, during which time no trading would occur - quoting only. Once the listing exchange prints a new trade, the pause would be lifted.  This is similar to the way that stocks come out of breaking news trading halts currently.

The plan will likely be implemented in 30 days.

EDIT:  in case it's not clear, it seems that the goals of this plan are to 1) allow for "circuit breakers" during times of large price movement and 2) to put the onus of responsibility back on the listing exchange - under these rules, the listing exchange is the one who controls the "re-opening" of a stock.


1 comment:

Anonymous said...

I'll be interested to see the details.

Given that trades can be reported slightly delayed, I wonder if the 10% (or whatever) movement is marked against trades, or against NBBO bid/ask midpoints (or something else).

I personally think that given the issue recently was a lack of liquidity, the measurements should be done off of NBBO rather than reported trades, since the goal of the pause is to rebuild liquidity - it only makes sense to me to enact a curb by measuring an aspect of liquidity...

This would also be easier to implement and be less subject to gaming, since a pause built off of last trading price would not prevent someone from hitting a 1 penny bid with a market order (unless there was also an execution requirement on all exchanges to not execute orders more than 10% away from the last price before the listing exchange has called a halt)... but would just prevent the next moronic order from executing, leaving the stock halted at the bottom