SEC Eyes Limit Up / Limit Down Tweaks


The U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority plan to tweak the equities limit up / limit down mechanism to better protect exchange-traded products from price swings like they experienced during the volatility spike of August 24, 2015.

Mary Jo White, SEC

Mary Jo White, SEC

“Orderly trading in an ETP requires a smoothly functioning market for the ETP’s holdings so that market makers and authorized participants can reliably value the ETP’s portfolio,” said SEC Chair Mary Jo White, in her keynote address at the Security Traders Association’s 83rd Annual Market Structure Conference in Washington, DC. “If the underlying market becomes disorderly, or if market makers and authorized participants step away from trading, the arbitrage mechanism can be disrupted, and an ETP can trade at prices substantially away from its implied value.”

To address ETP sensitivity to disorderly markets, Commission staff, exchanges, and the Financial Industry Regulatory Authority are assessing what changes they might need to make to the LULD mechanism.

Additionally, Chair White has instructed the SEC’s ETP Working Group to identify and analyze the structure, trading, and use of ETPs.

“The Working Group is considering, among other things: what portfolio characteristics and market structures support effective arbitrage; the roles and practices of market makers and authorized participants; and the effects of the ongoing exchange pilot programs to incentivize trading in less‑liquid ETPs,” she said.

Continuing on her theme of market structure enhancements, Chair White also stated that she expects Commission staff to present a revision to Regulation ATS for the Commission’s consideration in the coming months.

“Last November, the Commission proposed new rules to require NMS stock ATSs to make detailed public disclosures about their operations and the activities of their operators and affiliates,” said Chair White. “These disclosures would include information about trading by the operator and affiliates on the platform, the types of orders and market data used on the platform, and the platform’s execution and priority procedures. It would also enhance the Commission’s oversight of ATSs by enabling the Commission to review changes to their operation and intervene if necessary.”

The disclosures become even more critical as ATS, and other off-exchange trade volumes have grown and are responsible for more than 30 percent of equities market volume regularly and have lead to a significant gap in transparency, she noted. “The public had no way to tell which venues were executing the off‑exchange trades. I am pleased that FINRA has addressed this gap by providing enhanced disclosures on its website about these trades.”

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