By Rob Daly

Exchanges Plan ‘Clearly Erroneous’ Revamp

Leading U.S. equity-exchange operators Bats Global Markets, Nasdaq, and NYSE Group plan to harmonize their ‘clearly erroneous’ execution rules to improve liquidity levels after trading stops, according to exchange representatives.

This move is to address the extreme volatility that the equities market experienced on August 24, 2015, when the volatility triggered Limit Up/Limit Down trade halts 1,529 times, according to Bryan Harkins, head of U.S. markets at Bats.

The exchange operators plan to file updates to their respective rules and at the National Market System Plan to Address Extraordinary Market Volatility, which introduced the LULD mechanism, in the coming weeks.

As part of the filings, the exchanges look to eliminate time periods where securities could trade without LULD bands in lace, reduce the number of trading pauses, create a standard automated market re-opening for the primary exchanges after a trading halt, and eliminating the clearly erroneous rules when LULD bands are in effect.

The steps mirror those changes suggested by the market quality subcommittee of the U.S. Securities and Exchange Commission’s Equities Market Structure Advisory Committee in early August.

“The Clearly Erroneous rules at each exchange need to conform to the LULD bands,” noted Eric Noll, CEO of Convergex Group and chair of the market-quality subcommittee during the EMSAC meeting on August 2. “In other words, any trade that takes place within the band would stand and not be broken, and trades outside the LULD band would be eligible for the consideration of the Clearly Erroneous rules.”

ETF issuers and market marketers, who felt the brunt of approximately 83% of the trading stops on August 24, 2015, expect the changes to lead to more liquidity during times of stressed markets.

In the meantime, market makers have seen an improvement in liquidity after the exchanges clarified their individual Clearly Erroneous Errors rules after the events of August 24.

“There was disbelief by the self-regulatory organizations, regulators, and the marketplace segment that how the exchanges would apply their Clearly Erroneous rules in a scenario like a system-wide market event,” said Reggie Browne, head of ETF trading at Cantor Fitzgerald.

With the rule clarification and planned rule harmonization, “I can go into the stormiest of markets, apply my models, apply our capital, and create efficiency for all investors to transact trades efficiently without the fear of those trade becoming undone.”

The market has already tested the new environment, according to Bats’ Harkins. “On June 24, the day after the Brexit vote and the day of the Russell rebalance, there was only 68 trading halts compared to 1,529 halts on August 24,” he said.


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