Market opening failures increased summer volatility – SEC

SEC study into August market volatility finds opening procedures and trading regulations exacerbated the situation.

Trading regulations and market opening processes have been blamed for high market volatility seen during the summer of 2015, according to a preliminary report by the US Securities and Exchange Commission (SEC).

US equity markets and equity-related futures markets experienced price volatility at the very start of the trading day on 24 August 2015 resulting in 1,278 trading halts in 327 exchange-traded products (ETPs). The incident coincided with a global sell-off in August 2015 after a halt in market growth in China. Concern that the Chinese economy was due a severe slowdown led to fears that the rest of the world was also vulnerable.

The SEC’s study highlighted NYSE’s manual opening of its markets as it tried to make sense of the unpredictable price quotes. NYSE listed stocks began trading later than the scheduled time of 9.30am, resulting in price disruption that caused further volatility.

The SEC’s study said: “From 9.30am to 9.45am, more than 20% of S&P 500 companies and more than 40% of NASDAQ-100 companies reached daily lows that were 10% or more below their previous day’s closing price.”

The limit up- limit down (LULD) trading regulation is also highlighted in the SEC’s report as a potential cause, particularly on NYSE Arca. The rule prevents stocks from being traded outside of narrow price bands. It restricted how quickly the ETF’s could rebound after a significant price drop, spurring further volatility and delays.

SEC explains how NYSE Arca, “applied price collars to reopening auctions after LULD halts on August 24. The reopening auctions on NYSE Arca generated prices that were substantially less dispersed than reopening auctions on other primary listing exchanges. The reopening auctions on NYSE Arca also left many unexecuted order imbalances.”

The SEC and other self-regulatory organisations have implemented several regulatory initiatives before 24th August. This report will help with further evaluation of the practical operation of these initiatives.

Circuit breakers were introduced in China today following market volatility to avoid panic selling after the incident in August 2015. The first day of their operation saw the breakers triggered and trading suspended as weak manufacturing data led to a further sell-off.