The rapid introduction of a new US circuit breaker system that prevents wild swings in stock prices has been criticised after a single trade reporting error halted trading in Citi stock.
The criticism comes just days after the Securities and Exchanges Commission (SEC), which regulates all securities trading in the US, proposed extending stock-specific circuit breakers to a wider range of stocks.
On 29 June, the system temporarily halted trading in Citi shares, after a trade for 8,820 shares at a price of $3.3174 was printed on a trade reporting facility.
As Citi had been trading at the $3.80 mark, the report of a drop greater than the 10% swing needed to trigger the new pilot system meant circuit breakers stopped trading in Citi for a five-minute period across all US trading venues.
However the report was made in error and some traders are angry that trading in such a liquid stock could be halted by a basic error on a small trade.
“This was a nothing trade,” said Joe Saluzzi, co-head of the trading desk at Themis Trading, a US agency broker that specialises in equity trading. “Not only that, this sort of error happens all day long. Previously you would see the mistake, rectify it and no-one would ever know. Now it stops the market.”
According to Saluzzi, the current system is at risk from both error and deliberate abuse.
“All that happened was that the trade was reported at the wrong price,” commented Jamil Nazarali, managing director and global head of the electronic trading group at broker-dealer Knight Capital. “We were concerned when the SEC introduced this because there is typically some time given to reflect and comment on proposals. This was a case of something that could have been easily foreseen, had they not been in such a rush to get something on the tape.”
The circuit breaker scheme is undergoing a trial, and was introduced by the SEC after stock prices fell dramatically on 6 May 2010, for reasons yet to be established.
In order to prevent such volatility recurring, the SEC established the current system, which began operating on 10 June 2010 and which is set to run until 10 December 2010.
The scheme imposes stock-by-stock circuit breakers across all US equities markets. It is triggered by sudden price movements of more than 10% in an S&P 500 stock over a five-minute period. Previously, stock-specific circuit breakers had only existed on individual markets, which allowed trading on a stock to move to a new market if a breaker was tripped, limiting their effectiveness.
On the 30 June, the SEC proposed extending the rules to include all stocks in the Russell 1000 index. Nazarali feels that this too is being rushed. “Historically, it was a much more deliberate process. If you are taking the comment period seriously, you don't implement the rule as soon as the comment period is over,” he said.
The SEC has said the comment period on the rule extension will start ten days from the proposal's publication in the Federal Register.