Band Aids Held Together By Silly String


Yesterday we talked about the proposed limit up/down circuit breakers and how they were getting some negative comments during the SEC comment period.  Today, we want to review what the SEC actually did approve on June 23, 2011.  Since they couldn’t wait any longer for the limit up/down, the SEC approved a proposal submitted by the exchanges and FINRA that extends the current single stock circuit breakers (SSCB) to include all stocks Read SEC rule here.  The current SSCB’s only protected stocks in the S&P 500 and Russell 1000 and a select group of ETF’s.  But of course as a daily reader of our blog, you already knew this.

The new rule (effective August 8th) says that any stock not previously covered by SSCB’s will now be covered BUT the threshold for the trading pause to be enacted will be different for these stocks (so called Phase III securities).  Phase III stocks will need to move 30% or more to cause a breaker to go off if the stock is priced over $1 (and 50% or more if the stock is priced below $1).  The reason the the exchanges and FINRA proposed having a new 30% threshold was because Phase III stocks are “less liquid”.

A question that we have is  – why 30%?  Where did that get that number?  Wait a second, we know that number, we have seen it before somewhere.  Oh that’s right, 30% is also the threshold to break clearly erroneous trades during a multi-stock event (when more than 20 stocks trade in “error”).  Sounds like this is a way for “market makers” to set their quotes far away from the current NBBO (new rule requires that market makers set their quotes at least 28% away from NBBO) and keep a trade if it gets executed just above 30% from the NBBO, right before the stock were to get halted.  Those exchanges are very clever in providing ways for their most active clients to get benefits without any real obligations.

Here we are, over one year after the Flash Crash, and this is what our regulators and exchanges have come up to protect investors from another “Flash Crash”.  It is basically a patchwork of band-aids held together by silly string.  No wonder why investor confidence is down at its lowest level in years.