On Wednesday, the New York Stock Exchange, for the third time this month, delayed the close in certain stocks to allow offsetting liquidity to be solicited after 4 p.m. Behind the move were extremely volatile trading conditions and a rule change the Big Board put into effect three weeks ago.
The major indexes all shed more than 4 percent of their value on Wednesday, with the Dow Jones Industrial Average dropping 514 points. That day, the NYSE traded 1.6 billion shares.
The NYSE earlier this month extended a rule that allows it to declare an “extreme market volatility condition” at the close. The Rule 48 change, which went into effect on Oct. 2, permits the solicitation of interest to offset large imbalances in particular stocks after 4 p.m., and allows specialists to close those stocks after normal trading hours.
“It allows us to attract extra interest after the close when there’s a big imbalance,” Larry Leibowitz, head of U.S. execution and global technology at NYSE Euronext, told Traders Magazine. “It’s already helped customers a lot.”
Rule 48 was introduced in December 2007 for the open, to try to “ensure a fair and orderly opening of securities” when the market was extremely volatile. The Oct. 2 amendment is due to lapse at the end of this year, although Leibowitz said the exchange would “most likely” seek to extend it past 2008.
Invoking Rule 48 enables a floor official to temporarily suspend Rule 52, which dictates market hours, for particular stocks, as well as to temporarily suspend certain market-on-close policies. Suspending Rule 52 allows interest to be solicited after normal trading hours to offset an imbalance that existed at 4 p.m. When Rule 48 is invoked and Rule 52 is suspended for particular stocks, the NYSE electronically messages floor brokers, who can then contact upstairs desks. Offsetting interest must come through floor brokers, with the specialist entering the information into the exchange’s system by 4:30 p.m. at the latest.
In its filing to the Securities and Exchange Commission, the NYSE said it was extending Rule 48 to the close because of the tremendous market turmoil that resulted in vast sell imbalances on Monday, Sept. 29. That day the Dow Jones Industrial Average dropped 777 points, its largest-ever point drop.
The NYSE invoked Rule 48 at the close three times this month, on Oct. 9, 13 and 22. Earlier, the NYSE had allowed contra-side interest to be solicited and specialists to close stocks after 4 p.m. as an emergency option. “We did it on an emergency basis [on Sept. 29] in view of the critical situation, and immediately moved to file and formalize the practice,” Ray Pellecchia, a NYSE Euronext spokesperson, told Traders Magazine.
The Sept. 29 suspension of Rule 52 was done “on a stock-by-stock basis,” he said. On that day, the three stocks for which offsetting interest was solicited after 4 p.m. were Citigroup, Bank of New York and General Electric.
Some big traders support the NYSE’s closing move. “Mitigation of [price] dislocation is a good thing,” Peter Driscoll, vice chairman of the Security Traders Association, told reporters at the STA annual conference in Boca Raton last week. If additional interest can be attracted to reduce imbalances shortly after the close, he said, customers will benefit from the reduction in price movement at the end of the day. He stressed that the close should take place as close to 4 p.m. as possible.
James Conlin, president and CEO of Kabrik Trading, an agency broker with a floor operation, agreed that reducing the imbalance benefits the market. Suspending Rule 52 in volatile markets “enables the specialist to more fairly price the stock,” he said. “We’d certainly notify our customers, especially if they’ve indicated an interest in that name.”
However, the NYSE’s action has its critics. The concern is that Rule 48 changes the closing game for some stocks. “Rule 48 leaves me troubled,” said Chris Concannon, executive vice president for transaction services at Nasdaq OMX Group. “It allows the specialist to not disseminate an imbalance. That conflicts with fair access. He’s one professional trader who has a P&L interest, who doesn’t have to share imbalance information with the market. I can’t imagine us ever turning off the imbalance information we share with the market.”
Leibowitz and NYSE Euronext chief executive Duncan Niederauer explained the benefits of Rule 48’s expansion to the close to issuers in an Oct. 1 video conference. Referring to the quarterly expiration close on Friday, September 19, Leibowitz said: “We got specialists involved, we made calls to block desks, we had a chance to create an orderly close. This is really the time the NYSE model differentiates itself from all the market models out there.”
Niederauer concurred. “If we see a large buy or sell imbalance in the market at the end of the day, as we did on both Monday and Tuesday [Sept. 29 and 30], to the sellside Monday and more to the buyside yesterday, we’re not going to do whatever we have to to close the stocks right on the dot of 4,” he said.
When the market is extremely volatile and offsetting interest can’t be submitted by 4 p.m., what’s better, in his view, is having a “more orderly close” in which market quality can trump speed. “It’s not about being fast,” Niederauer said. “It’s about moving as quickly as you can, but also getting to the right outcome.” He added that early feedback from issuers had been extremely positive.
Richard Rosenblatt, founder of agency broker Rosenblatt Securities, noted that Rule 48 at the close is little more than a change in process at the exchange. Declaring a Rule 48 condition on the close allows brokers to enter offsetting orders that arrive after 4 p.m. but prior to a time set by the floor official for the closing auction. “This is a much more efficient process than using the post-close crossing session 1 option, which was previously used to process post-close liquidity,” he said. “Now, specialists can fold that trading interest into the closing auction.”
Rosenblatt pointed out that the solicitation of interest to offset imbalances after 4 p.m. should ideally be as broad as possible. However, he said, “the nature of this process requires a fluid human interaction and does not lend itself to automated order delivery.”
For Nasdaq’s Concannon, the NYSE’s ability to accept offsetting orders after 4 p.m. is worrisome. “Rule 48 allows them to keep their market from closing and to call out to individuals on a selective basis to close out imbalances,” he said. “The human element brings out some interesting conflicts. They may think that’s better [for their market and customers], but I think the conflict outweighs any benefit you can get from giving specialists more time to offset imbalances.”
Rule 48 can be invoked by the CEO of NYSE Euronext, the CEO of NYSE Regulation, or one of their designees. The official declaring a Rule 48 condition is expected to consult with the SEC prior to invoking the rule.
