The Financial Industry Regulatory Authority, along with U.S. stock exchanges, are again tinkering with the New York Stock Exchange Arca’s new limit-up/limit-down (LULD) trading system program, offering up two main amendments to the pilot program that’s designed to address trading execution in highly volatile days.
In what amounts to a fifth proposed amendment to this pilot program first implemented in April, Finra and the exchanges involved in this effort suggested that the LULD program rejigger two major points: one relating to halts that take place late in the trading session, and the other focused on just which exchange-traded products should qualify for the program’s “Tier 1” stocks.
Essentially, the amendment suggests that NYSE Arca rethink the reopening of trading in a given stock if a trading halt occurs within 10 minutes of the closing of a regular trading session. As the program currently stands, the exchange would not reopen trading in a halted security for the remainder of the day if that halting happened within five minutes of the closing bell.
The argument here is that a five-minute window at the end of the session is too small—at too volatile a time of day—to allow for fairly reopening and closing trading again.
The note submitted to the Securities and Exchange Commission this week also suggests that highly illiquid ETPs that don’t meet a notional average daily volume of $2 million be excluded from the program’s “Tier 1 Stocks” halting program because they are triggering too many halts that aren’t necessarily linked to the execution or to volatility of a security.
These illiquid securities were once included in that top-tier group of stocks even without meeting volume criteria because they track similar benchmarks to those ETPs that make the cut, according to the document. But their illiquid trade, and the wide quotes that are often associated with these stocks, are triggering halts that in no way reflect inadequate execution.
The latest round of verbiage is a stark reminder of just how difficult tackling the issue of excessive market volatility is, and this debate is far from over. In the end, exchanges and regulators are looking to implement a program that controls volatility in an effort to prevent trading accidents and sudden price movements such as what happened on May 6, 2010—the “flash crash.”
“The limit up-limit down mechanism is intended to reduce the negative impacts of sudden, unanticipated price movements in stocks, thereby protecting investors and promoting a fair and orderly market,” the document submitted to regulators said.
“The Participants believe that the proposed amendment meets the goals of the Plan, which is to address extraordinary market volatility,” it said.
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