*Note: This post was originally written 2 weeks ago, so keep that in mind*
On May 6th, 2010, I watched my terminal as sh*t appeared to hit the fan. As I tweeted from my desk, I watched with more bemusement than horror (as I was 100% cash at the time) stocks like Accenture and Procter & Gamble tumble 10, 20, 50%+ in a few seconds, if not intra-second. I recall that afternoon, especially after 4pm EST, lots of talking heads, traders, and other participants wondering/wildly speculating about which trades would be busted and how/why.
To this day, I’m still not sure why there was any real confusion, as NASDAQ and NYSE both had established “Clearly Erroneous” policies in place at the time. I even tweeted about them, such as (a sample):
It’d been a while since I went through this stuff – like 2 or 3 years – so I had to look it up, forgive me, but I’ve yet to see any reason why the SEC (FINRA, and/or the exchanges) decided to usurp the existing policies on 5/6/2010 (unless, of course, the exchanges’ websites were out-dated or something along those lines). All things being equal, I thought the existing rules, were they actually applied, would have been more or less sufficient, and more importantly, were they adhered to, would have provided certainty in a time where it was severely lacking. For example, per the NYSE (doc created 10/2009):
So, to grossly over-simplify, most affected stocks would have had to trade > 5% or 10% away from the last consolidated price in order for those trades to be cancelled as being “clearly erroneous.” This, to me, is not a totally unreasonable framework or rule set, although perhaps in this modern age where information (and thereby prices) can move instantly, I’d change the thresholds to 10-15% for stocks at most price levels, and maybe 15%, 20% tops for multi-stock events. Unfortunately, these rules – or even slightly modified versions thereof – were completely ignored on 5/6. Again, I’ve yet to hear, why.
On September 10th, the SEC issued a press release bragging about their valiant actions to protect markets and investors by “fixing” these rules, making several comments which stick out as curious (at best) in my mind, including:
On May 6, the markets only broke trades that were more than 60 per cent away from the reference price in a process that was not transparent to market participants. By establishing clear and transparent standards for breaking erroneous trades, the new rules should help provide certainty in advance as to which trades will be broken, and allow market participants to better manage their risks.
First: 60%?!?! From where/what did anyone decide on that threshold? Why not 10%, you know, as stated in the pre-existing rules? If the exchanges and the SEC decided the “incident” was of sufficient magnitude to overturn the existing rules, why not pick a threshold more easily rationalized like 20 or 25%? Were there THAT many stocks (more than a handful or two) that saw insane movements ala Accenture and P&G? Agreed, the process utilized to bust trades (and whatever process(es) were used to decide on that process) on 5/6 was almost totally opaque, but why not talk about the existing rules? Am I missing something here folks?
Now, through 12/10/2010, the circuit breaker rules will be as follows:
For stocks that are subject to the circuit breaker program, trades will be broken at specified levels depending on the stock price:
- For stocks priced $25 or less, trades will be broken if the trades are at least 10 per cent away from the circuit breaker trigger price.
- For stocks priced more than $25 to $50, trades will be broken if they are 5 per cent away from the circuit breaker trigger price.
- For stocks priced more than $50, the trades will be broken if they are 3 per cent away from the circuit breaker trigger price.
Where circuit breakers are not applicable, the exchanges and FINRA will break trades at specified levels for events involving multiple stocks depending on how many stocks are involved:
- For events involving between five and 20 stocks, trades will be broken that are at least 10 per cent away from the “reference price,” typically the last sale before pricing was disrupted.
- For events involving more than 20 stocks, trades will be broken that are at least 30 per cent away from the reference price.
So, riddle me this, Mrs. Schaprio: Why did it take 4 months to say, effectively, “this is what we should have done, no matter how you slice it?” Don’t give me “Summer,” because that’s a bogus excuse, at best. I want to know – in no uncertain, politically-padded language – why the SEC and the exchanges acted as they did (folded like lawnchairs) on and after 5/6, and I want to know now.