The regulatory landscape has changed since the May 6th flash crash. In an effort to prevent a similar occurrence, new circuit breaker type trading halts have been instituted. These circuit breakers are designed to stop trading in any individual security whenever a single trade moves the price by at least 10% from its so-called fair value. Trading is halted for 5 minutes when the circuit breaker parameters are breached.
This idea seems to make sense, right? It is a good faith effort, by the powers that be, to prevent any crazy, unforeseen things happening in the marketplace. While in theory the halts may make sense and work to prevent a future May 6th situation, real life experience tells a far different tale. The regulation is actually causing chaos in the market instead of preventing it. Since the new circuit breaker regulations were placed into action in June, they have been triggered half a dozen times. Out of these 6 times, only one halt was legitimate. You may remember the trading halt in Genzyme on July 23rd. This was the only proper trade halt in the 6 actual times the regulation went into effect. What has happened is that single false positive prints are triggering the circuit breakers. In other words, tiny share amounts have caused erratic halts in a variety of stocks. Citigroup and Cisco are cases in point.
FINRA, NYSE Euronext, and Nasdaq OMX are taking steps to prevent single small trades from triggering the circuit breakers. They have proposed to keep the 10% rule but only halt trading if the trade is within the NBBO. Trades occurring 10% away from fair value and outside the NBBO, while not immediately triggering a halt, will be monitored closely. If 3 or more trades occur in the same manner, the halt will be instituted. While these new market driven proposals are a step in the right direction, more study needs to be done. For example, the new FINRA rules proposal does not take into consideration intermarket sweep orders that take place outside of the NBBO.
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