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%.