Heads of the biggest U.S. trading venues will submit plans to federal officials this week for shutting down stock markets nationwide during investor panics.
NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc., Direct Edge Holdings LLC, International Securities Exchange Holdings Inc. and CBOE Holdings Inc. are negotiating the threshold of gains or declines at which trading should stop, according to two people familiar with the matter. Their chief executive officers met yesterday with Securities and Exchange Commission Chairman Mary Schapiro in Washington.
“You have to agree in advance on the point at which a short-term circuit breaker would be put in,” said John Coffee, a law professor at Columbia University in New York. “We may want the circuit breaker to kick in on a 5 percent decline.”
Officials were summoned to the SEC and Treasury Department after the Dow Jones Industrial Average fell as much as 9.2 percent on May 6, its biggest tumble since the crash of 1987, before paring losses and closing down 3.2 percent. Almost $700 billion was erased from American equity markets over one eight- minute span as actions to slow down trading on the New York Stock Exchange caused sell orders to swamp electronic venues, according to data compiled by Bloomberg.
The executives could provide no clear explanation for the selloff, according to the people, who asked not to be named because the meeting was private. None saw evidence that the plunge began with a trading error. CNBC citied “multiple sources” in reporting May 6 that New York-based Citigroup Inc. may have entered a mistaken transaction that contributed to the plunge. Citigroup said it found no evidence it was involved in an erroneous order.
Options Trade
A $7.5 million trade in bearish options by Universa Investments LP, a Santa Monica, California-based hedge fund advised by Nassim Taleb, may have triggered selling that exacerbated the plunge, the Wall Street Journal reported. Calls and e-mails to Taleb and Universa President Mark Spitznagel seeking comment weren’t immediately returned.
“Given that a selloff was happening and a big trade came in, and people would have needed to sell futures to hedge, it could have exacerbated the situation,” said Joe Kinahan, chief derivatives strategist at TD Ameritrade Holding Corp. in Chicago and a former S&P 500 options trader on the CBOE floor. “I don’t know if one trade is going to take the market down.”
U.S. stocks rallied today after European policy makers announced a loan package of almost $1 trillion. The S&P 500 gained 4.4 percent to 1,159.73 at 4:07 p.m.
Aligning Rules
Exchange CEOs are examining steps for aligning trading rules to prevent conflicting systems from worsening stock-market plunges. The group meeting with Schapiro agreed on a framework for “strengthening circuit breakers and handling erroneous trades,” according to a commission statement.
Regulators and exchanges face pressure from lawmakers and President Barack Obama’s administration to offer proposals aimed at preventing future crashes even though the SEC hasn’t determined what caused last week’s free-fall. Schapiro and exchange officials gave Treasury Secretary Timothy Geithner an update on progress they’ve made at a briefing today.
At the two-hour meeting at the SEC, Schapiro and representatives from the NYSE, Nasdaq and other trading venues discussed the need to revise market-wide circuit breakers and implement halts for individual stocks, according to the people, who asked not to be identified because the talks were private.
The New York Stock Exchange currently has circuit breakers that pause trading when the entire market falls 10 percent before 2 p.m. New York time. The NYSE also uses so-called liquidity replenishment points, which slow trading in companies that experience sudden price moves.
Replenishment Points
The triggering of liquidity replenishment points on May 6 encouraged orders to flow to alternative platforms with few if any buyers, worsening the decline, NYSE Euronext Chief Operating Officer Larry Leibowitz said last week.Schapiro and exchange heads discussed specific percentage figures that would trigger new circuit breakers, said the people. Plans will be refined over the next day, according to the SEC statement.
The May 6 plunge swamped demand, pushing share prices of companies from Accenture Plc to Exelon Corp. to pennies. Nasdaq announced it would cancel trades on all exchanges that were more than 60 percent above or below prices at 2:40 p.m. New York time, just as equities plummeted.
Proposing regulations to handle such erroneous trades was a focus of Schapiro’s meeting with executives, with discussions focusing on how to best define what constitutes a false trade, said the people. The exchanges agreed that new rules are needed.
Schapiro, Commodity Futures Trading Commission Chairman Gary Gensler and executives from the NYSE, Nasdaq and CME Group Inc. will testify on the market rout before a House Financial Services subcommittee tomorrow.
--With assistance from David Scheer and Nina Mehta in New York. Editors: Chris Nagi, Daniel Hauck.
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