The Securities and Exchange Commission’s Tuesday announcement about the coming of individual stock circuit-breakers that are uniform across exchanges was welcome news after the debacle of May 6th’s market activity.
But the last line of the SEC’s press release wanders into the world of fixing an adjacent problem that likely doesn’t exist.
First, the headline news described in the first paragraph. With what must be studied understatement, SEC Chairman Mary Schapiro said, “We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges.”
Of course it was. Why one exchange (The New York Stock Exchange) was ever allowed to slow trading in particular shares if they fell a large amount in a short period of time while other exchanges were not so obliged is now a most appropriate question. Looking back to May 6, it in hindsight seems a practice destined to help cause disaster as liquidity dries up and stock prices briefly plummet.
So now the SEC, acting quickly, proposes a five-minute pause across exchanges when the share price of one of the Standard & Poor’s 500 stocks
changes 10% or more in five minutes. That’s a pretty big move in a short time, and the proposed five-minute pause is a reasonable amount of time. In the chaos of May 6, when the Dow Jones Industrial Average dropped 700 points in minutes, only to recover most of that in a number of additional minutes, 30 stocks met this pause threshold.
The last line of the SEC press release hints at another change coming: adjustments to the market-wide circuit breakers that have been in place for a long time and which are rarely triggered. They would stop all stock trading temporarily if the major indexes dropped precipitously.
Here’s the quote. “The SEC staff is working with the markets to consider recalibration of market-wide circuit breakers currently on the books – none of which were triggered on May 6. These circuit breakers apply across all equity trading venues and the futures markets.”
The notation that the triggers didn’t stop trading on May 6 implies a criticism of that fluid trading. But if they did take effect when the DJIA was down nearly 1,000 points, the market wouldn’t have had a chance to correct itself and wipe away a considerable amount of the loss. Having markets close down, as opposed to a five-minute pause in certain stocks, would cause massive concern, likely resulting in the spooling up of selling to be executed as soon as trading resumed.
In other words, rather than the deep breath and reassessment that might flow from a five-minute pause of trading a single stock that is just getting hammered, the closing of all trading, even for a brief time, could be devastating for sentiment and lead to a sell-at-any-cost mentality.
Exchange-wide circuit breakers need to stay very wide. If the SEC staff is looking at them, those watchdogs should consisder expanding rather than contracting the trading limits.