Experts Embrace Limit Up/Limit Down

Regulators, exchange officials and industry leaders spoke out on Wednesday in support of the Securities and Exchange Commission’s proposed limit up/limit down rule.

At the 12th annual market structure conference of the Securities Industry and Financial Markets Association, officials including Gregg Berman, senior advisor to the director of the SEC’s Division of Trading and Markets, gave glowing reviews to limit up/limit down.

Ira Hammerman, senior managing director and general counsel at SIFMA, introduced Berman, who gave the keynote address at the conference. Hammerman emphasized that new regulations should be balanced and effective.

According to Berman, limit up/limit down would be just that. He said it was an improvement over the current “circuit breaker” rule, under which stocks stop trading when they have moved beyond a certain percentage threshold for a day.

Circuit breakers do not take into account a stock might be moving based on legitimate concerns. Limit up/limit down, by contrast, would allow stocks to move within a certain band, and if they moved precipitously up or down, it would suspend trading for five minutes rather than halt it for an entire trading day.

“Limit up/limit down will accommodate fundamental price moves,” Berman said.

Other conference speakers on a panel on market volatility echoed Berman’s comments. Elizabeth King, head of regulatory affairs for GETCO, a market making firm, said the price bands in limit up/limit down would give market participants a chance to adjust to new conditions without shutting down trading altogether.

“It’s better to keep markets open,” she said. “Pauses are better than trading halts.”

Matthew Lavicka, a managing director at Goldman Sachs, called limit up/limit down the “number one” reform that markets need to implement in order to prevent something like the May 6, 2010 “flash crash” from happening again.

A lot of the details of the limit up/limit down proposal get complex, according to Joseph Mecane, executive vice president and chief administrative officer for U.S. markets at NYSE Euronext. Once it is implemented, however, we will end up with a stronger market structure in place, he said.

Not everyone in the industry supports the proposed rule, however. In the past, CME Group has been critical of plans for limit up/limit down.

Richard Redding, a managing director for CME group, said markets can generally deal with volatility and regulators need only be concerned with what happens if there is a crisis. He also questioned whether the current infrastructure is ready to support the limit up/limit down proposal.