Putting a limit on how far an individual stocks could move up or down in a given time period may be more effective than the circuit breakers that are being tested on the nation's stock exchanges, according to a panel of executives from the four exchange operators at the Capital Markets Consortium in New York Tuesday.
"While I think the circuit breakers are doing a good job, they were implemented pretty quickly and they are working as intended, I think limit-up limit-down would work more effectively,'' said Brian Hyndman, senior vice president of transaction services for the Nasdaq OMX Group, which operates the most active exchange.
With a limit-up, limit-down procedure, individual stocks could not trade outside a specified range, say 10%, before being forced to pause and let orders replenish themselves and determine a correct price. This kind of price collar would prevent a reccurence of any future events like the May 6 Flash Crash from gaining momentum, he said.
The pauses also allows, with a brief interruption of 5 seconds or so, trading to continue, said Joe Bracco, a vice president at BATS Exchange, the fourth most active exchange. The limit-up limit-down approach to prices would also prevent broken trades, Hyndman and Bracco said. By having a pre-specified range of expected trading around a price, market participants can easily see "what's clearly erroneous and what's not,'' Bracco said.
"You have no need to bust trades,'' said Oscar N. Onyema, founder and principal of Market Strategists, after the panel session. "I think we're going to see it."
On May 6, trades that moved 60% above or below their last “good” price were declared erroneous and canceled.
On Sept. 7, Securities and Exchange Commission Chairman Mary Schapiro said circuit breakers were an "essential first step" in preventing further flash crashes. But she said the federal regulator would go through a “careful review” of price bands and their effectiveness.
Three days later, the SEC expanded its test of circuit breakers to include a wider range of stocks and, for the first time, exchange-traded funds.