News Often Triggers Trading Halts

Despite the hue and cry over trades done in error, the single-stock circuit breakers introduced after the May 2010 flash crash were triggered by news events more than half of the time, according to a report by Credit Suisse.

Titled "Pardon the Interruption-The Impact of Trading Halts," the report found that 51 percent of trading halts from June 2010 to September 2011 came after fundamental news emerged about a stock. The report discovered 111 trading halts during that period-56 from news.

About 11 percent of circuit breakers were triggered by a "fat finger" trade, and bad prints only caused about 6 percent of trading halts, the report found. About 32 percent of trading halts were in cheap or illiquid stocks.

During 2010, many traders publicly grumbled about needless trading halts in large stocks such as Citi, but the data runs counter to the perception that most trading halts were caused by errors.

"Certainly, some people will always view trading halts as a nuisance, but they may not be as negative as some people put them out to be," said Ana Avramovic, an analyst at Credit Suisse.

According to the report, trading halts attributable to news are potentially undesirable to some market participants who are looking to profit from a first-mover advantage.

Still, exchanges have always halted stocks when certain news is pending to allow investors time to digest all the relevant information. The single-stock circuit breakers can be seen as a continuation of that practice.

When important news is released during trading hours without advance warning, circuit breakers can allow an orderly adjustment process in which market participants have time to correct for imbalances before submitting their orders, the report found.

In the cases where news events triggered the circuit breakers, no harm came to the market, and in other cases the circuit breakers were clearly helpful, the report found.

Currently, the Securities and Exchange Commission plans to replace the single-stock circuit breakers with a proposed limit up/limit down rule, which would introduce a pause for 15 seconds before enacting a full trading halt.

The limit up/limit down proposal could eliminate trading halts caused by bad prints, Avramovic said. That would be an improvement over the current single-stock circuit breaker rule, she added.

Limit up/limit down faces opposition from within the futures and options industries, since derivative products could still continue trading during a pause in the underlying equity, which would make hedging problematic.

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