Schapiro: SEC Considering "Other Steps" to Prevent Disruptions
August 11, 2010
The Securities and Exchange Commission is looking at such mechanisms as price collars and limits on upward or downward movements in a stock in a single day, in the wake of the May 6 "flash crash."
"We are considering ... whether other steps are appropriate to reduce the risk of sudden disruptions and clearly erroneous trades," SEC chairman Mary L. Schapiro said at the outset of a meeting of the Joint Advisory Committee of the SEC and the Commodity Futures Trading Commission on the implications of the events in May, when the Dow Jones Industrial Average fell nearly 1,000 points in a seeeming flash and stocks, such as that of Accenture, fell as low as one cent.
The one-cent trades, which occurred in Accenture's case in one 10-second period, have been attributed to the presence of "stub" quotes put in by market makers who never expect such residual orders to actually be executed. But, when no other orders exist to buy, they take effect.
Schapiro said the SEC is considering "deterrring or prohibiting the use of stub quotes by market makers" and that the SEC is "studying the impact of trading protocols at individual exchanges, including the use of trading pauses, price collars and self-help rules.
The CME Group, for instance, has an electronic trading platform, known as Globex, that stops spikes before they hit, with a five-second pause. The Stop Price Logic predefines thresholds for trading in an instrument. If the thresholds are breached, the market automatically stops for five or 10 seconds. During that brief pause, no orders get matched. But new market orders can get entered. Existing orders can get modified or cancelled.
NYSE's Arca electronic exchange in July proposed "price collars'' to the SEC. The collars “would prevent a market order from trading more than a certain percentage away from a calculated reference price that would be continuously updated based on market activity,” the exchange said in its July 9 proposal.
In effect, a band of, say, 3 percent on either side of a price would be constantly maintained. If the next trade fell outside that band, the trade would be stopped.
Also, commodities markets used limits that apply to full days of trading. A "limit down" sets the maximum amount by which the price of a futures contract may decline in one trading day. "Limit up" establishes the maximum gain in a day.
So far, the SEC has been pursuing two policy initiatives, since the Flash Crash.
The commission established a circuit-breaker tack that stops trading in individual stocks whose prices move 10 percent in five minutes. Right now, the breaks apply only to stocks in the Standard & Poor's 500. But the SEC is reviewing comments on its proposal in June to expand its pilot test to include stocks in the Russell 1000 index and 344 exchange-traded funds.
Schapiro said she hopes the commission approves the expansion "very soon."
The SEC is also working with national exchanges and the Financial Industry Regulatory Authority to amend and clarify rules for breaking clearly erroneous trades."
Schapiro said the SEC and CFTC hope to deliver their report and analysis on the events of May 6 some time next month.
For the report, she said SEC staff has been reviewing raw transaction and order data, order book snapshots, trade summaries, information about broken trades
and information on the New York Stock Exchange's version of breakers, known as Liquidity Replenishment Points, which were triggered May 6.
The commission is also taking in "first-hand accounts" of what went on from market participants.
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