Liquidity replenishment points, the New York Stock Exchange’s system of curbs to slow trading when prices move rapidly, shouldn’t be banished from U.S. equity markets just yet, NYSE Euronext (NYX:US) said.
The company is seeking to amend stock market rules to reinstate LRPs during the first 15 minutes and last half hour of trading, periods that aren’t currently covered by the program that replaced them, known as limit-up/limit-down. Both systems are designed to restore order when share prices swing unusually. Technology changes to add the LRPs should be ready by June 6, NYSE said in the filing.
Regulators have been fine-tuning systems for pausing trading since the so-called flash crash of May 2010 briefly erased $862 billion from equity markets. Two initiatives for curtailing volatility were implemented last month for one-year pilots, among them limit-up/limit-down for individual shares.
“NYSE is just trying to have some sort of protection in the short term while LRP is completely phased out by LULD,” Sang Lee, managing partner at Boston-based research firm Aite Group LLC, said in an e-mail. “There seems to have been some gap between when LULD is in effect and being phased in. I think the NYSE has always made it clear that LRP will be replaced by LULD.”
NYSE and NYSE MKT, the exchange operator’s platform for smaller companies, said in April they would phase out LRPs as the new curbs are introduced for specific stocks.
At the time, NYSE criticized the Securities and Exchange Commission for ending the program without an “impact analysis” study, according to a filing in April. While the regulator has said multiple volatility curbs operating together could create confusion, the exchange said it should have been allowed to test whether its LRPs could run smoothly in conjunction with the new programs.
LRPs “will benefit investors, issuers and market stability by offering an additional layer of protection during the periods currently not covered by the limit-up/limit-down protections,” Rich Adamonis, a spokesman for NYSE, said in an e-mail today.
The Securities Industry and Financial Markets Association and Deutsche Bank AG told the SEC in letters in 2011 that too many curbs might impair the effectiveness of single-stock circuit breakers.
U.S. stock exchanges and the Financial Industry Regulatory Authority, which oversees almost 4,300 brokers, introduced curbs for individual stocks after the flash crash to halt shares when they rise or fall at least 10 percent in five minutes. The limit-up/limit-down system, which is replacing that program, is likely to cause fewer halts, according to the SEC.
Under the limit-up/limit-down system, trades aren’t allowed to take place more than a specified percentage above or below a stock’s recent average price. If no trades occur within the band for more than 15 seconds, a five-minute halt will ensue, according to the SEC.
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