Exchanges Propose New Unified Trading Rules

August 11, 2016

The country’s three major exchanges announced today they have agreed to work together for new common trading procedures when reopening after a trading halt.

Bats Global Markets, owner of ETF.com, the New York Stock Exchange and Nasdaq said they will be filing a new set of exchange rules with the SEC that propose to unify how all three resume trading when a halt occurs with ETFs and stocks. This comes nearly a year after more than 1,000 ETFs and stocks were halted on Aug. 24, 2015, causing dozens of ETFs to be traded well below fair value.

Currently the exchanges do not have the same procedures to resume trading after such a halt, which fueled the market swings and price dislocation on that day.

Beyond the unified reopening procedures, the exchanges also propose to eliminate the time periods where securities could trade without the limit up/limit down (circuit breaker) bands in place, reduce the number of trading pauses, and remove the “Clearly Erroneous Execution” rules when the limit up/limit down bands are in place.

Getting Ahead Of Regulators

“Last year’s flash crash wasn’t necessarily ‘caused’ by chaos between the exchanges, but it certainly was exacerbated by it,” said Dave Nadig, director of exchange-traded funds at FactSet and ETF trading expert. “It’s to the exchanges’ credit that in many ways they’re getting ahead of the regulators and trying to coordinate their disparate rule sets to minimize the chances of the same thing happening again. The work they’re doing about initial opening, limit up/limit down triggering and reopening is exactly what needs to happen.”

Nadig added that while the details are just coming out, the proactive nature of the exchanges in making these proposals is admirable.

“The devil can sometimes be in the details, so we’ll see the final suggestions in a few weeks, but overall, I’m enormously impressed at the way these competitors have pulled together to improve the system,” he added.

Industry Call To Action In March

In March, leaders of the ETF industry joined a group in writing a letter to the SEC (Why This ‘Open Letter’ To SEC Matters) petitioning for overhauls to the market microstructure to prevent further flash crashes in ETFs and stocks.

At the heart of the matter on Aug. 24, 2015 were the inconsistencies between how different exchanges handled big swings in securities (the limit up/limit down circuit breakers) and how securities were reopened after those breakers were hit.

The problem spoke to the fragmentation of exchanges and the difference in how each exchange resumed trading, resulting in price discovery problems. Today’s announcement aims to address those problems.

Drew Voros can be reached at [email protected].

 

 

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