Nasdaq Targets 'Nefarious' Circuit Breaker Snafus
Traders Magazine Online News, September 3, 2010
Nasdaq OMX, in a bid to remedy the shortcomings of new trading halt rules, is proposing to fine tune them. The exchange operator's goal is to avoid halts based on trades done by mistake. Such erroneous trades have stopped trading several times this summer.
The new rules, which employ circuit breakers, were put in place on June 10 in the hope of preventing a reoccurrence of the carnage wrought by the May 6 "flash crash." On that day, hundreds of securities plummeted sharply in a matter of minutes, often executing at ridiculous prices.
Under the circuit breaker rules, Nasdaq and the other exchanges halt trading in any stock in the S&P 500 Index that moves by at least 10 percent in a five-minute period.
Nasdaq's modification to the circuit breakers was proposed in a letter to the Securities and Exchange Commission last week. Nasdaq wants to only halt trading if the print is in question is inside the NBBO.
If a print falls outside the NBBO, Nasdaq will not immediately halt trading. Instead, the exchange operator will wait until three trades occur outside the NBBO before halting the stock.
Nasdaq proposed the modification because a number of trading halts have been triggered by trades executed in error-so-called "clearly erroneous" trades. A trade that occurs outside the NBBO "is likely an erroneous execution," Nasdaq told the SEC. Most trades occur within the NBBO, sources tell Traders Magazine.
Since the rule went into effect, several stocks have been halted following these error trades, including Intel, Citigroup, Cisco, the Washington Post Co. and Anadarko Petroleum. Under the rules, stocks are halted for five minutes before being reopened for trading.
Traders have complained that error trades of a few hundred shares should not halt trading in securities that may trade millions of shares per day.
Kevin Cronin, director of global equity trading at Invesco, a money management firm, speaking before the SEC on August 11, criticized "this nefarious problem." He pointed out to "small trades causing circuit breaker elections and halts in stocks like Cisco and Citigroup that have no business being halted. They're such small share amounts."
Cronin's comments are echoed by others. Dave Cushing, director of global equity trading at Wellington Management Co., told the SEC in a letter last month that the firm questions "whether any single trade, particularly a small erroneous one, should be allowed to trigger a trading halt for a security."
Despite trader pique, the SEC does not appear overly concerned about the snafus. SEC Chairman Mary Schapiro, speaking at a joint SEC-CFTC investigative hearing on August 11, told panelists that "While we have had a number of triggers, I'd be interested to know if they have caused any harm to the marketplace. It's not my perception that they have."
Nasdaq and the other exchanges were aware when they drafted the circuit breaker rules that erroneous trades might trigger halts. They told the SEC, at the time, they would exclude a trade from their circuit breaker calculations if they deemed it erroneous.
That has proved impossible however, as the circuit breaker triggers before an exchange has a chance to review the trade. Thus, Nasdaq's proposal to automate the process.
For more information on related topics, visit the following channels:
