On March 2, three days after U.S. stocks posted their biggest plunge in four years, and one weekday before Regulation NMS’s new trade-through rule went into effect for exchanges and ECNs, Erik Sirri blinked.
Sirri, the Securities and Exchange Commission’s market regulation chief, presented the industry with the possibility of an “industry-wide use of the self-help exception” to the new quote-protection rule.
Sirri said “market-wide problems” could trigger an SEC-authorized recess from the trade-through provisions for a specified period of time. Reg NMS extended the old trade-through rule to all NMS stocks and required protected quotes to be immediately and electronically accessible by other market centers.
“This industry-wide exception would effectively suspend operation of all trade-through provisions,” he wrote in a statement posted on the SEC’s Web site. “For example, it would allow all trading centers and order routers to execute trades and route ISOs [intermarket sweep orders] without regard to the protected quotations displayed at any particular time.”
As it stands now, the self-help exception to the Reg NMS quote protection rule permits trading centers to bypass the quotes of marketplaces that are experiencing systems problems or that fail to respond immediately. Sirri’s overture was to potentially extend the exception to the entire industry in the case of an emergency.
Additional factors that might have contributed to the SEC’s last-minute hand-wringing were trading glitches resulting from the tremendous surge in volume on February 27.
Dow Jones Indexes had trouble calculating the Dow Jones Industrial Average as a result of a data backlog on February 27, and the DJIA began trailing the Standard & Poor’s 500 and Nasdaq 100 at around 2 p.m., after tracking them for much of the day. When Dow Jones switched to a back-up computer system at 2:59 p.m., the index caught up and dropped 200 points within a few seconds.
At around 3:30 p.m. that day, NYSE’s hybrid trading system couldn’t keep up with the incoming tide of orders. Many orders that arrived during the last half-hour of trading simply didn’t get executed. Meanwhile, some floor traders reverted to manual trading, relying on pads, pencils and chalkboards.
The SEC apparently feared that extreme volatility in the markets at a time when new rules were being implemented could compromise the ability of the markets to “continue trading and establishing the most efficient prices possible for customers.”
However, Reg NMS’s trading phase launched on March 5 without hitch. The NYSE couldn’t route out to several markets, but the industry didn’t swoon. And so far, the industry hasn’t needed to call on Sirri’s Easy Button Self-Help Solutio8
