The New York Stock Exchange and sister market NYSE MKT Tuesday filed plans with the SEC to shut down their Liquidity Replenishment Point programs, a set of price bands that are designed to curb the kind of volatility most visibly seen in the May 6, 2010 flash crash.
The exchanges, in their filings, said the shuttering of the plans was not their choice. They say they were required to, as part of a separate SEC plan to protect markets from volatility.
Both the NYSE and NYSE MKT, in their filings, said they believed the plans “have delivered concrete benefits to public investors in the many erroneous or aberrant trades they have prevented” but would phased out as a result of the SEC’s plan to institute a separate set of price bands designed to put a stop to volatility trading.
That is the SEC’s Limit-Up, Limit-Down Plan, which exchanges are currently in the process of testing and implementing. That plan came out of the SEC’s attempts to prevent a recurrence of the 2010 flash crash.
In that plan, trading in a security will stop when the price suddenly moves up or down a certain percentage, compared to the average price for the prior five minutes. For most Standard & Poor’s 500 and large capitalization stocks, the trigger would be a movement of 5 percent or more. For smaller stocks, 10 percent or more. Price bands double in opening and closing periods.
In the NYSE and NYSE MKT plans, electronic trading stops more quickly and in narrower bands. If, for instance, a $7 stock sees a movement of 20 cents, one way or the other, in a 10-second period, the Liquidity Replenishment Point program kicks in.
At that point, a market maker finds or makes matches in unfilled orders in a given security, in an auction system. In some cases, electronic mechanisms handle the resolution. Resolution, when handled manually, typically takes 30 seconds.
The LRP program was in place on May 6, 2010 and was credited with curbing volatility in share trading on the NYSE.
The SEC did not respond to request for comment, before this story was posted.
The staffs of the SEC and the Commodity Futures Trading Commission in their October 2010 report on the flash crash events, however, indicated that no single market’s controls could prevent or deal with such disruptions. In that report, the staffs found that the trigger for the drop of nearly 600 points on the nation’s stock markets was a program initiated by a mutual fund complex a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) on a derivatives exchange as a hedge to an existing equity position.
The NYSE said it will stop the LRP program for large stocks on Monday, April 8, when the limit-up, limit-down program is set to start. The program will stop for all stocks of any size, when the second phase of the limit-up, limit-down program goes into effect in August.
The SEC staff, in its study of the 2010 crash, did not find that the LRP program contributed to the crash, noted James J. Angel, capital markets professor at Georgetown University. But the SEC is saying, “we are going to make you take it away, any way.’’
“I think the SEC is being inconsistent,’’ Angel said.
The NYSE and NYSE MKT filings said the SEC forced their moves. The commission, they said, stated there was “the potential for unnecessary compleixity that could result if the plan were adopted and exchange-specific volatility mechanism were retained” and that “to this end, the commission expects that upon implementation of the plan, such exchange-specific volatility mechanisms would be discontinued.’’
The NYSE and NYSE MKT said no “impact analysis” was done and the result could be “unintended consequences to the detriment of investors and the marketplaces as a whole.’’
The point was echoed by Angel who said the SEC has not done “significant analysis” on either the removal of the LRP plans or the institution of the LULD (limit-up, limit-down) plan.
This, he said, is just another example of micromanagement of market structure by the constantly changing staff” of the Trading and Markets division of the SEC.
