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July 1, 2010

NYSE Stands By Its LRPs

By James Ramage

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The SEC has said it wants to determine whether LRPs played a role on that day in the net loss of liquidity that produced the extreme volatility in prices. In its joint report with the Commodity Futures Trading Commission on the preliminary findings of May 6, it said that it would closely examine LRPs and other procedures exchanges use for handling or executing orders to establish whether they slow liquidity down unnecessarily.

If LRPs were responsible for ultimately exacerbating price volatility, the SEC and CFTC wrote, "it potentially could have caused some NYSE securities to decline further than the broad market decline."

Joseph Cangemi

But the report also noted how it's possible that the LRPs actually reduced volatility on May 6 by assembling liquidity that absorbed some of the excess selling interest. Either way, the NYSE would not comment on the SEC's intentions for LRPs.

Joseph Cangemi would. The head of equity sales and trading at ConvergEx's global electronic trading unit likes LRPs. Cangemi traded for many years on the NYSE floor and is also the current vice chairman of the Security Traders Association.

"The NYSE's LRPs serve a good purpose," he said.

An LRP pauses automated trading on the Big Board when the price of an NYSE-listed stock rises or falls by roughly 2 to 4 percent, Pellecchia said. When an LRP is triggered, trading on the NYSE will halt for a time to allow additional liquidity to enter the market.

Then, trading in the name on the NYSE reverts to manual auction-style, permitting new bids and offers. A market maker then tries to amass a large, price-discovering trade in an attempt to attract liquidity on the other side of the buy-sell equation, Pellecchia added. The average LRP process takes a few seconds. Typically, LRPs are triggered a couple hundred times a day, Pellecchia said. On May 6, that number was in the tens of thousands of times.

In NYSE-listed names, LRPs would be triggered prior to the new, industrywide circuit breaker. That circuit breaker would pause trading in S&P 500 stocks if the price moved 10 percent or more, up or down, in a five-minute period.


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