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Another high-profile flash crash and once again the market is pondering the unintended consequences of wholesale rulemaking.
In this case, the New York Stock Exchange has been left wondering if it was all too predictable.
The drama took place in the final seconds of trading last Friday in New York when shares in NYSE-listed Anadarko Petroleum – which trade at around $90 each – plummeted to just one cent, wiping around $45bn from the oil group’s market value in the blink of an eye.
Amid 45 minutes of confusion, some of the world’s largest institutional investors, including Wellington, Fidelity, BlackRock, Vanguard and State Street, saw billions of dollars of their holdings in the company effectively wiped out.
NYSE then stepped in to cancel all trades that were below $87.56, or five per cent off the level Anadarko had been trading at before the crash, using guidelines for so-called clearly erroneous executions.
Such was the magnitude of the cancelled trades that when the prices were restored, the effect was to raise the S&P 500 by nearly 1.5 points from where it closed.
But the latest incident has brought into question the effects of the Securities and Exchange Commission’s new rules for circuit breakers, or bands designed to limit rapid fluctuations in a stock’s price.
New guidelines, called limit-up, limit-down, are intended to create uniform bands across the highly fragmented US market of 13 stock exchange and about 50 alternate trading venues.
Crucially though, until August when the new rules are fully implemented, the circuit breakers will not activate in the first 15 minutes and final 30 minutes of market hours when auctions are held at NYSE and Nasdaq to determine prices for all US shares.
In the case of Anadarko, a heavy bout of selling in the final 60 seconds of trading on Friday – amid a dearth of liquidity in its shares – meant sell orders were matched by the best available buy bids, far below levels that a circuit breaker should have allowed.
NYSE declined to comment on Friday’s activity but it’s not hard to imagine its reaction. To meet the SEC requirements, it had to phase out its so-called liquidity replenishment points (LRPs) – brief auctions that kicked in to moderate volatility in a security. This, NYSE has argued, allowed people to come into the market at a crucial moment and add much needed liquidity.
Indeed, less than two months ago, NYSE told the SEC that it wished to “respectfully, but strenuously, object not only to the substance of the commission’s decision to effectively insist that the exchange abandon LRPs”.
As Justin Schack, managing director at Rosenblatt Securities, points out, the previous NYSE rules helped make it the only exchange to not have to cancel trades after the flash crash of May 2010, when hundreds of stocks oscillated wildly. The SEC declined to comment.
But will this be the shape of things to come? As of earlier this month, NYSE has applied the rules to 773 stocks listed on its exchange, including Anadarko. A few more similar incidents and NYSE may not be the only one wishing things were back to the way they were.
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