(Bloomberg) -- BlackRock and State Street, along with more than a dozen industry participants, are urging regulators to take steps to ward off extreme market volatility after the stomach-churning price swings of last August.
The group pressed the SEC in a letter to force exchanges to harmonize rules on trading halts designed to curb volatility. Executives from Cantor Fitzgerald, Charles Schwab and JP Morgan Asset Management were among those signing the letter.
The letter comes amid debate over how to prevent a recurrence of Aug. 24, a trading day marked by delayed openings, more than 1,000 halts and wild price swings. More than $1 trillion in value was erased from the U.S. stock market that day before prices partially recovered. The SEC issued its own 88-page postmortem of the day’s events in December, but did not include any specific proposals for how to prevent a similar occurrence.
The letter says that the SEC should direct exchanges to harmonize the reopening of securities that have been in a so-called limit up/limit down halt, and clarify and align rules around clearly erroneous trades. SEC action is the only way to address problems with those systems, the group said.
"We believe these are the changes that can be implemented swiftly and have the greatest impact on confidence in the market," Dave LaValle, U.S. head of SPDR ETF capital markets for State Street, said in an interview.
Under the limit-up/limit-down system, when stock prices move by more than a certain percentage, trading is suspended to prevent a flood of buy or sell orders from creating more extreme price moves. The goal of the system, which was introduced in response to the flash crash in 2010, is to prevent traders from quoting stocks outside predictable price bands in an attempt to limit volatility. But exchanges have varying rules on how equities reopen after a halt, and how certain trades can be nullified.
The group’s proposals have been echoed by stock market participants since August. The NYSE made a similar suggestion around coordinating reopenings after trading halts in its own list of suggestions published in January.
"Absent these changes, especially with the volatility in the current equity markets, we are concerned that the markets are susceptible to a similar event occurring at any time," the letter said.
There are some thornier issues the SEC should also address, the group said, including how securities open across markets and when to halt the entire stock market. In comparison, harmonizing reopenings after trading halts would "reflect a consensus among most market participants and could be implemented relatively swiftly, but only through SEC action," the letter said.