Stock exchanges join on plan to counteract market volatility

The nation's three biggest stock exchanges are nearing release of a joint plan aimed at calming extreme volatility like the 1,000-point sell-off that rocked financial markets nearly a year ago.

NYSE Group, Nasdaq and Bats Global Markets on Thursday said they're working on new rules to increase market "resiliency" and establish a joint procedure for resuming trading in stocks and exchange traded funds after market halts. The plans will be filed with the Securities and Exchange Commission in the coming weeks, the exchanges said.

The SEC said it was pleased with the exchanges' plans and looked forward to reviewing their filing.

The collaborative effort represents an update to the 2012 "Limit Up-Limit Down" rule the SEC approved on pilot basis to prevent trades in individual stocks outside of specified price bands. Used during times of volatility, the rule allows investors to continue stock trades that fall within the price bands, but halts trading above or below those limits.

The exchanges said their efforts focus on:

• Eliminating time periods when securities could trade without Limit Up-Limit Down price bands in place.
• Reducing the number of trading pauses.
• Establishing a common standard for automated trading re-openings after a market pause.

The joint plans also aim at eliminating rules for "clearly erroneous" transactions — trades that are inconsistent with the market price at the time of execution — during periods when the Limit Up-Limit Down price bands are in effect.

Additionally, the exchanges said they have planned or established safeguards to prevent trades during in the interval between the resumption of trading after Limit Up-Limit Down halts and publication of new trading bands. "This effort is designed to reduce subsequent trading halts and price dislocations," the exchanges said.

The trading venues also have joined in using the previous day's closing price for a stock as the reference during market openings when no opening price is immediately available from that stock's primary exchange. The change has led to a roughly 75% reduction in Limit Up-Limit Down pauses, the exchanges said.

The proposals represent a response to the August 24, 2015, Wall Street turbulence in which the Dow Jones Industrial Average briefly plunged more than 1,000 points. The Dow ultimately recovered but still finished the day 588 points lower in a session that included multiple trading halts some market participants said made it difficult for stock prices to return to proper trading levels.

In March, nearly 20 financial firms sent the SEC an open letter that urged changes in existing market rules "to limit the likelihood of a similar event occurring in the future." Without adjustments, "we are concerned that the markets are susceptible to a similar event occurring at any time," the group cautioned.

Three of the companies, BlackRock, Vanguard and State Street Global Advisors, on Thursday called the exchanges' new plans "an important step towards improving equity market structure" that would "protect investors and promote fair and orderly markets."

Follow Paste BN reporter Kevin McCoy on Twitter: @kmccoynyc