FINRA Proposes New Measures to Curb Market Volatility
The dramatic ‘flash crash’ on Wall Street on May 6 served as a wake-up call to regulators that the growing trend of automated high-speed trading calls for updated regulations in order to deal with stock market volatility. With this in mind, the Financial Industry Regulatory Authority (FINRA) filed a proposal for public comment on Tuesday 18 May whereby trading on individual stocks will be paused if the price moves either way by 10 percent or more within a period of five minutes. Should the proposal become a reality, it will most likely be instituted as a six-month pilot program to test the waters, starting mid-June.
Investigation by the SEC into the events of May 6 noted that they had not found evidence of fat-finger errors, computer hacking, or terrorist activity. While these possibilities have not been entirely ruled out, the focus of the investigation will shift to establishing what effect activity in one market can have on other markets, and the role of electronic market makers in what is being referred to as a “generalized severe mismatch in liquidity”. In a statement, SEC Chairman Mary Schapiro revealed that regulators remain convinced that “the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges.” With automated high-speed trading capable of processing trades in millisecond continuing to gain favor with traders, the need for consensus on uniform so-called ‘circuit breakers‘ has taken on a sense of urgency.
Following the period stipulated for public comment, and subject to SEC approval, FINRA‘s proposed rules aim to introduce the circuit breakers on individual stocks. This pause in trading should a stock go up or down by 10 percent or more, will allow the affected stock to attract new trading interest, and after establishing an appropriately reasonable market price, the stock would continue trading in an manner which is both fair and orderly.
There is little doubt that the intraday volatility experienced on Wall Street on May 6 gave investor confidence a battering. It is anticipated that the proposed circuit breaker measures will go a long way to restoring faith in the markets and adding a measure of stability that will be of benefit to all stock market traders.