Finra Pushes Back Circuit Breaker Implementation

Terry Flanagan

The Financial Industry Regulatory Authority (Finra) is proposing to push back implementation dates for market-wide circuit breakers, intended to curtail the impact of erroneous transactions.

In Securities and Exchange Commission filings, Finra, a self-regulatory organization of the securities industry that is subject to oversight by the SEC, is seeking comment on proposals to delay the operative date of its market-side circuit breakers until April 8. They were originally scheduled to go into effect earlier this week.

Finra is delaying the operative data to correspond to the initial date of operations for the limit up-limit down plan.

The rule proposal promotes uniformity across all U.S. markets concerning when and how to halt trading in all national market system (NMS) stocks as a result of extraordinary market volatility.

In addition, delaying the operative data until the initial date of operations of the limit up-limit down plans will allow Finra and the exchanges to assess the impact of the two programs on the marketplace, or whether other initiatives should be adopted in lieu of the programs, Finra said.

In the wake of the May 2010 ‘flash crash’ and other subsequent market events, trading firms, self-regulatory organizations and regulators have implemented controls in order to prevent and contain ‘fat finger’ errors.

“Inadvertent distorting errors such as fat finger or erroneous LEIs [legal entity identifiers] is being addressed through the increased use of messaging such as FIX Protocol, which, depending on the prevailing standards, participants may need to update their order management systems so that an adequate pre-trade risk requirement can be fulfilled,” said Daniel Parker, vice-president of trading technology firm SunGard’s capital markets business. “SROs and regulators should define instances and rule-based solutions that provide for contingencies around algo and DMA [direct market access] orders.”

Eric Noll, executive vice-president of transactions services at exchange operator Nasdaq, told TabbForum: “Though transparency in markets is at an all-time high, since virtually all trades are executed electronically, understanding exactly how orders get executed has never been more opaque, as 13 exchanges, 50 dark pools, a plethora of internalizing brokers and a virtually unlimited set of automated execution strategies has made it virtually impossible to fully track and understand how an institutional order gets routed, sliced and diced, and executed.”

Noll added: “Between technology’s drive towards greater connectivity, faster communication and smaller trade sizes, and fragmentation driving new trading venues and strategies, the market has become more complex, high-speed and arcane.”

Under the market-wide circuit breaker plan, if trading is halted in all NMS stocks for a Level 1 or Level 2 market decline, Finra will halt trading in all NMS stocks until trading has resumed on the primary listing market.

If, however, the primary listing market does not re-open a security within 15 minutes following the end of the 15-minute halt period, Finra may permit the resumption of trading on at least one other national securities exchange.

If a Level 3 market decline occurs at any time during the trading day, Finra will halt trading in all NMS stocks until the primary listing market opens the next trading day.

Finra has also proposed extending the pilot program on “clearly erroneous transactions” until September 30. The program provides for uniform treatment of clearly erroneous execution reviews in multi-stock events involving 20 or more securities, and in the event transactions occur that result in the issuance of an individual stock trading pause by the primary market and subsequent transactions that occur before the trading pause is in effect.

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