SEC Approves NYSE’s New Market Volatility Rules

Move designed to speed up trading during times of market stress.

Reviewed by: Chuck Mikolajczak
Edited by: Chuck Mikolajczak

New York (Reuters) – The U.S. Securities and Exchange Commission has approved plans by the New York Stock Exchange to speed up and smooth early morning trading in times of market stress.

In a ruling released on Tuesday, the SEC said the NYSE could allow stocks to open for trading on particularly volatile days, even in the absence of clear price disclosure that is normally required before trading opens.

The NYSE had asked for the new rules after disorderly trading on Aug. 24, 2015, when there was a record intraday drop in the Dow Jones industrial average.

The exchange, a unit of Intercontinental Exchange, still needs to make technological changes before the new rules can go into effect. Kristen Kaus, a spokeswoman for the NYSE, would not provide any detail about how long that might take.

The rules themselves are somewhat technical. Unlike other exchanges, which are nearly fully automated, at the NYSE, people on the trading floor open the stocks, a process the exchange says gives it greater stability because people can intervene in ways that trading algorithms cannot.

For an individual stock to begin trading on a typical day, the trader responsible for that stock—known as the market maker—has to disclose the likely price at which a stock will open, known as pre-opening indications.

Manmade Slowness

On volatile days or when trading was disordered, the exchange could invoke its "Rule 48," allowing market makers to open trading on stocks manually on a case-by-case basis, even if they could not identify a stable price. Because it required human judgment and interaction, Rule 48 sometimes slowed the ability of shares to start or resume trading.

The newly approved procedures would eliminate Rule 48 and instead set up specific guidelines for when shares could open or be reopened after a trading halt. The theory is that this will allow trading to start more quickly.

"This is really a consolidation to make it a bit more deterministic, orderly and more rules-based, so it is a very good thing, a smart move by the exchange," said Jamie Selway, a market structure analyst at ITG in New York.

ETFs And Rule 48

The new procedures would always allow individual stocks to open without pre-market indicators if they were set to trade within 5% of their previous day's close. On particularly volatile days, those shares could open as long as their prices were within 10% of their previous close.

The exchange could declare a volatile day and go to the 10% guide under any one of three scenarios: if futures contracts on the Standard & Poor's 500 Index, called e-mini futures ESc1, are pointing to an open more than 2% away from the closing price the prior day; if the exchanges are attempting to reopen after a marketwide trading half; if the exchanges determine it is necessary to maintain a fair and orderly market.

Members of the exchange-traded fund community have been critical of Rule 48 and other attempts by exchanges to curb market volatility, citing the extreme market volatility suffered last Aug. 24.

Trading Halts Disrupted ETFs NAV

On that day, trading halts caused particular problems for ETFs because they are required to trade their underlying securities when investors trade the ETFs themselves. But shares of underlying securities were halted, while the ETFs themselves were not, causing ETF prices to fall much more sharply than declines in their net asset values would have caused.

Dave Nadig, director of exchange-traded funds at FactSet Research Systems, said the rule change was a step in the right direction: "While those aren’t going to solve all of our problems in what are increasingly fragile equity markets, they are certainly going to go a long way."

But not all market participants believe the new rules will be any help in the event of the next big sell-off.

Market participants will "really realize that it’s a mistake when one day the markets are really under stress and stocks just open like that and there is no opportunity to slow it down," said Ken Polcari, director of the NYSE floor division at O’Neil Securities in New York.