Monday, August 15, 2016

SROs’ upcoming rules changes will address trading halts

By Mark S. Nelson, J.D.

Bats Global Markets, Inc., Nasdaq, and NYSE Group announced they will submit a series of related rule changes to the SEC as part of a larger effort to revise the National Market System Plan to better handle periods of market volatility. Several highly publicized “flash” crashes during the past few years underscore the need for limit up/limit down (LULD) requirements and for additional fine-tuning of these rules regarding the resumption of trading after halts.

Market solution. The exchanges’ proposals seek to: (1) avoid periods where LULD bands are absent; (2) create markets with fewer trading pauses; (3) establish a standardized mode of re-opening after a pause; and (4) obviate the need for the clearly erroneous execution rules, at least while LULD bands are in effect. The exchanges also plan systemic changes to reduce halts and price distortions that can result from “leaky” LULD bands.

EMSAC sees promise, pitfalls. SEC Chair Mary Jo White, in opening remarks to the August meeting of the Equity Market Structure Advisory Committee (EMSAC), said she was pleased the committee would address industry harmonization efforts along with defects in the current LULD reopening auction process.

The EMSAC’s Market Quality Subcommittee’s recommendation noted that although LULD bands’ primary function is sound, the re-opening process is flawed. While the subcommittee acknowledged, and praised, industry efforts to improve the LULD mechanism, members expressed some doubt as to whether these changes alone will fix the re-opening auction process.

Previously, Commission staff issued a study regarding trading pauses for the SEC’s Division of Economic and Risk Analysis. Staff from the Division of Trading and Markets also published a research note that includes an extensive discussion of LULD halts.