Plan to Curb Volatility in U.S. Stocks Delayed

Published January 07, 2013

| Reuters

A pilot program to limit volatility in the U.S. stock markets scheduled to be implemented next month is not likely to be rolled out until April as exchanges and financial industry groups take more time to prepare.

The so-called "limit up-limit down" initiative, approved by the U.S. Securities and Exchange Commission in June, would pause trading of individual U.S.-listed stocks if they moved outside a price range based on where they had recently traded. During the timeout, traders could assess whether a stock's move was based on fundamentals, a glitch, or some other reason.

Big Board operator NYSE Euronext and Nasdaq OMX Group Inc sent proposed testing schedules for the program to traders on Monday, while BATS Global Markets and Direct Edge, the No. 3 and No. 4 U.S. equities exchanges, respectively, released their proposed testing schedules in recent weeks.

The changes to the schedule were in response to requests by the securities industry for more time to test systems, a NYSE spokesman said.

The Securities Industry and Financial Markets Association (SIFMA) asked the SEC to postpone the implementation date of the pilot program in a letter to the regulator in late November.

SIFMA said at the time it was "extremely concerned" that there was not enough information on the plan to properly develop the technology specifications for the systems and coding changes in time for the Feb. 4 launch.

Recent events such the trading glitch at Knight Capital Group Inc, the botched Facebook Inc IPO on Nasdaq and BATS' failed IPO, have focused attention on improving testing to prevent problems in the largely electronic marketplace.

Under the proposed new schedule, limit up-limit down would be rolled out in two phases. Phase one would begin on April 8 and be completed on May 31. The second phase would be rolled out on Aug. 1 and be completed by Sept. 30.

The new schedule has to be approved by the SEC, but industry participants have said the regulator is comfortable with the proposed revisions.

New market-wide "circuit breakers," which when triggered halt trading in all exchange-listed securities on U.S. markets, would be implemented on April 8 as well.

Existing market-wide circuit breakers were adopted in October 1988 and have been triggered only once, in 1997. The changes lower the percentage-decline threshold for triggering a market-wide halt and shorten the amount of time trading is suspended.

The market structural fixes are aimed at preventing a repetition of the flash crash, which temporarily wiped out about $1 trillion in paper value in the stock market in a matter of minutes.

For some, the unprecedented market drop confirmed fears that high-speed, automated trading represent a systemic risk to the foundations of capitalism. For others, it was an embarrassing blip that called for measured adjustments to an otherwise well-functioning market.

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