BlackRock has concocted its own remedy for days of extraordinary volatility in the U.S. equity market.
The manager is proposing a three-part cure: the whole $23 trillion market should automatically come to a halt if a significant number of shares stop trading; venues should use the same triggers to suspend trading throughout the day; and rules on when to pause securities should apply equally to shares, listed options, futures and exchange-traded products.
More than a month after the equity market was convulsed on Aug. 24, asset managers are still trying to soothe the frayed nerves of their investors by suggesting a way forward for equity markets. BlackRock on Wednesday published its recommendations on how to limit the damage from future days of extreme volatility.
"They’re all very doable changes without a whole lot of magic," Barbara Novick, co-vice chairman of BlackRock, said in an interview. "I don’t think they’re going to be contentious. I don’t think they’re going to be difficult."
Much of the report focuses on reforming a system called limit-up/limit down. Stock exchanges typically allow securities to rise or fall by a set percentage. If the stock moves as much as the threshold, the exchange halts trading, preventing an avalanche of buy or sell orders from creating ever more extreme price moves. Hundreds of securities repeatedly stopped trading on the morning of Aug. 24 because they hit the limits set by their respective trading venue.
Ms. Novick said the wildest fluctuations on a bad day for markets could be dampened if a circuit breaker halted the entire market. Wednesday’s paper says that further work is needed to determine the number of individual stock halts that would automatically trigger a pause for the whole market.
“In that scenario, you’d rather have had a market-wide halt to get everything back together than not have one,” she said.
A second fix, according to the BlackRock report, would be introducing uniform price bands for individual securities. At the moment, the price bands double in the first 15 minutes and the last 25 minutes of the trading day. Trading in individual equities is paused if the price rises or falls to the limit set by the exchange and then stays there for 15 seconds.
Leading up to the publication of the position paper, some of the world’s largest issuers of ETFs — including BlackRock, Vanguard Group and State Street — were said to be in talks with stock exchanges and market-makers to avoid the problems that afflicted their products on Aug. 24.
“With the recognition that moments of high volatility and discontinuous pricing may be a persistent aspect of today’s markets, we see a need for market participants, exchanges and regulators to improve the U.S. equity market’s ability to cope with extraordinary volatility,” the report said.