Stock exchanges and ECNs are in final talks to harmonize their “clearly erroneous trades” policies, and an agreement is expected to be reached this week.
The group of market centers, which held one meeting last week, is expected to meet again tomorrow. Sources involved with the talks believe they will reach a consensus at the meeting.
Once agreement is reached, the exchanges will have to make rule filings with the Securities and Exchange Commission before any changes can go into effect. The SEC is said to be waiting impatiently for the filings.
The group is under pressure from brokers after a disastrous couple of days in September, when tens of thousands of trades had to be busted. The problems occurred after the SEC temporarily banned short sales in 799 financial stocks.
The bad trades occurred on the electronic exchanges and ECNs. Their speediness and a decrease in liquidity resulting from the short-sale ban combined to cause trades to execute at prices that bore no relationship to the stocks’ fair market value.
Brokers complained vehemently to the market centers over the snafu. They have since put pressure on them to come up with uniform policies for dealing with erroneous trades.
As it stands now, the exchanges all treat clearly erroneous trades differently. This frustrates broker-dealers. Even before the snafus of September, the Security Traders Association, in a white paper, called for harmonization of policies.
It reiterated its stance at its annual convention in Boca Raton, Fla., last month.
Nasdaq’s policy could become the model for all exchanges and ECNs, sources say. The SEC approved changes to Nasdaq’s clearly erroneous trades policy earlier this year.
Nasdaq will bust or adjust trades if the transaction price falls too far outside the NBBO. For executions over $1.75, and up to $25, Nasdaq will bust or adjust if that trade price is 10 percent away from the NBBO. For executions over $25, but less than $50, Nasdaq will bust or adjust if that trade price is 5 percent away from the NBBO. For executions over $50, Nasdaq will only bust or adjust if the trade price is 3 percent away from the NBBO.
The working group might augment this policy to take into account volatile market conditions by relaxing the parameters. One idea is to increase the above-mentioned percentages if the S&P 500 Index opens significantly higher or lower than the previous day’s close.
For example, if the S&P 500 opens 3 percent higher or lower, the above-mentioned percentages would double. If the index opens 6 percent higher or lower, the above-mentioned percentages would triple.
Typically, if a clearly erroneous trade occurs across multiple market centers, it is busted. If it only occurs on one market center, the price could be modified.