Year after Aug. 24, volatility spurs fewer market halts

A year after trading halts at the opening of U.S. equity markets resulted in a $1.2 trillion loss in market value on Aug. 24, 2015, changes put in place by exchanges since then appear to have made it less likely that the markets can be overwhelmed by such halts.

Since August 2015, “the work to harmonize how openings work across all the exchanges (has) really been addressed,” said Jim Ross, executive vice president, chairman of SPDR exchange-traded funds, at State Street Global Advisors, Boston.

One of the most recent volatile trading days — June 24, the day after the U.K.'s vote to leave the European Union — had far fewer halts on trades when compared with Aug. 24, 2015. According to Nasdaq Inc. data, a combined 1,278 common stocks and exchange-traded funds on all exchanges experienced halts on Aug. 24, 2015. On June 24, there were only 68 halts of common stocks and ETFs.

“Brexit shows that the changes have worked,” Mr. Ross said.

In the last few months, the three major exchanges — the New York Stock Exchange, Nasdaq Inc. and BATS Global Markets Inc. — have started to implement new limit-up/limit-down rules that update those established in a Securities and Exchange Commission pilot program in 2012. The new rules, along with others that the three exchanges announced Aug. 11 would be submitted to the SEC, will create uniform price band limits focusing on four areas:

neliminating the time periods when securities could trade without LULD bands in place;

nreducing the number of trading pauses;

nstandardizing automated reopenings following a pause in trading; and

neliminating clearly erroneous execution rules when LULD bands are in effect.

Sources for this story said those changes have led to fewer trading curbs that had been set off on Aug. 24, 2015, by “circuit breakers,” which halted trading for five minutes on any S&P 500 stock that rose or fell more than 10% in a five-minute period, and limit-up/limit-down price curbs that prevented trades in individual securities outside of a specified price band above and below the average price of the stock in a five-minute trading period.

Both were created by the exchanges in response to the original “flash crash” in 2010.

Those curbs were set off on about half of the S&P 500 stocks listed on the New York Stock Exchange at the market open. Sell orders on those stocks overwhelmed the market while many ETFs that held those stocks continued to trade, adding issues with price discovery to the problems. The rush to sell was fueled by strong selling the previous week by China's surprising currency devaluation and big declines earlier that day on the Asian and European markets.

The S&P fell 5% within minutes, to 1,867.01, and ended the day down 3.66%.

Tal Cohen, senior vice president of North American equities at Nasdaq in New York, said along with LULD rules put in place since Aug. 24, the three exchanges also have increased communication among each other and with other market participants to try to mitigate impacts of black swan and other potential volatile events, such as the June 24 aftermath of the Brexit vote.

“The market has become much more resilient, and we're seeing far fewer halts,” Mr. Cohen said. “Much of that is since Aug. 24. ... That's been because of the greater level of communication between all market participants. It's not just because of the rules or the market structure. Looking at Brexit, I think many people said that markets worked pretty well that day.”

Timothy Coyne, SSgA's Boston-based head of institutional sales and global capital markets, SPDR ETFs, agreed. “Less than one year away, in market structure timelines, I think there's been a quick response. Exchanges have been working together to take on these issues. They've created a platform to discuss these issues.”

Among other changes, sources pointed to the NYSE's plans to remove Rule 48, which allows market makers to delay opening a stock when markets are volatile and was blamed for exacerbating big swings last Aug. 24. “That limited transparency at the open, creating more risk for market makers,” Mr. Coyne said.

The NYSE plans to introduce a revised Rule 15 that would require market makers to publish pre-opening indications if prices change 5% or more, which would eliminate the need for Rule 48.

Those changes are beneficial to institutional investors because they promote “consistency, fairness and resiliency in the market,” Mr. Coyne said. “We promote timely change to reduce complexity. You don't want an overly complex market structure.”

Andrew Brooks, vice president, head of U.S. equity trading, at T. Rowe Price Associates Inc., Baltimore, said there's been progress in making markets stable, dependable and efficient. “Collaboration creates an environment where investors feel better about price discovery,” Mr. Brooks said. “That's important to build a system of trust, to try and make sure we don't face those situations again.”

However, Richard Vigsnes, senior vice president and global head of equity trading at Northern Trust Corp., Chicago, said while efforts by the exchanges have been an improvement, there's more that needs to be done to ensure a repeat of Aug. 24, 2015, doesn't happen.

“At the margins, some changes have been made,” Mr. Vigsnes said, “but the overarching issue is that there's a lot of interrelation between different market participants, and it will take a lot of coordination between them to put the tiger back in the cage. ... I think (the exchanges) have made some changes and that Aug. 24 won't happen the same way again, but I'm less a believer that their coordination has made something like this a low-probability event.”

The market structure changes that have been made, and those potentially in the future, will benefit the institutional investor, including asset owners, said SSgA's Mr. Ross and Bryan Harkins, executive vice president, head of U.S. markets, BATS Global Markets, New York.

“Without question,” asset owners will benefit, Mr. Ross said. “Remember that a lot of the stuff we're talking about is changes that will improve equity markets. That's pretty straightforward. If market makers can work with confidence, then spreads are tighter and that's better for every investor.”

Added Mr. Harkins: “All market structure changes serve the buy-and-hold investor, and they serve them very well. But we're always on a march to perfection. LULD is an example; there's a difference between investors and traders. Investors have a long-term view, while traders are more short-term, opportunistic. Look at any volatile day. As long as we don't turn long-term investors into short-term traders because of market structure issues, then we all are doing well. We want these long-term investors to concentrate on investing, not on market structure.”

Tim Barron, Chicago-based chief investment officer at Segal Rogerscasey, said among the takeaways from Aug. 24 is that their asset owner clients have a greater interest in how their managers trade and in market structure.

“Our managers are talking more about trading and liquidity (with asset owners) and how it affects them as asset owners,” Mr. Barron said. “We want to know if other managers are thinking about that as well.” n