Limit Up/Limit Down Eases In

Terry Flanagan

The launch of a system designed to rein in volatility during turbulent equity markets has had a quiet first few weeks.

Limit up/limit down, rolled out on April 8 across U.S. exchanges, “has been relatively uneventful so far,” said Burke Cook, managing director for U.S. transactional services at Nasdaq OMX.

Mandated by the U.S. Securities and Exchange Commission, limit up/limit down replaces single-stock circuit breakers in a measure to address extraordinary market volatility. The system puts a price band around each security that, when reached, would render a trade outside the band as not executable on any exchange. The security price and percentage parameter would be based on previous day’s close.

If trading isn’t able to occur within the price band for longer than 15 seconds, limit up/limit down calls for a five-minute trading halt. Limit up/limit down currently applies to only certain securities and is effective on trading days between 9:45 a.m. and 3:30 p.m. Eastern time; a second phase expected to start in early August will apply to all exchange-traded securities and operate from the start of trading at 9:30 a.m. until the close at 4 p.m.

Speaking to Security Traders Association members on a conference call earlier this week, Cook said that in the first week of limit up/limit down, no limits were reached for a population of 1,430 securities. During week two, there were several limit states and pauses on very illiquid Arca ETPs where one bid or offer was left in the band, said Cook, whose job covers regulatory policy pertaining to market structure.

Cook questioned whether the ETP selection methodology was a correct sampling and said it would be hard to predict what the next tier will look like, and whether the securities should be treated like large-cap stocks.

While the topic of the STA call was limit up/limit down, the most pressing issue for the industry is the  financial transaction tax, speakers said.

STA members were updated from their March call that on April 17, U.S. Rep Keith Ellison (D-Minn.) reintroduced the Inclusive Prosperity Act of 2013 (HR 1579.) STA members were warned his prepared statement accompanying the bill is incendiary to hedge funds and other high-frequency traders he blamed for the market and economic crash of 2008. Ellison’s statement said the tax was expected to generate up to $300 billion a year in revenue to help offset the U.S. budget deficit, and the tax “would reduce harmful financial market speculation, discourage high-volume, high-speed trading, and slow down the proliferation of ever more complex derivatives.”

The STA call also offered an update on the decimalization pilot study; four senators asked about it in Congressional hearings this month to confirm Mary Jo White as SEC chairman, and a house subcommittee heard testimony on tick sizes, but there has been no formal action taken. The study will likely come up again at the May 1 SEC hearing on small and emerging companies, at which Duncan Niederauer of NYSE Euronext and Robert Greifeld of Nasdaq will present exchange viewpoints.

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