Markets Seek Technical Solutions to “Nightmare” Scenarios
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Even as they struggle to understand the origins and particulars of Thursday’s chaos,
regulators, traders and academics seem to agree the gist of the solution is that markets need uniform rules for intervening when a stock goes into free fall.
Even as they struggle to understand the origins and particulars of Thursday’s chaos,
Even as they struggle to understand the origins and particulars of Thursday’s chaos,
regulators, traders and academics seem to agree the gist of the solution is that markets need uniform rules for intervening when a stock goes into free fall.
Even as they struggle to understand the origins and particulars of Thursday’s chaos,
regulators, traders and academics seem to agree the gist of the solution is that markets need uniform rules for intervening when a stock goes into free fall.
The much-discussed “stock market” — with its connotation of a single entity — is a misnomer. [br]
Investors can buy and sell stocks through about 50 markets in the United States.
Most of the trades are placed through computer networks, at the direction of computer programs, and orders are routed automatically to the market offering the best price.
It is a system that sometimes spins out of control if the computerized sellers cannot find enough buyers.
Last year, on April 28, 2009, the stock price of Dendreon, a Seattle biotechnology company, plunged 69 percent in 70 seconds before trading was halted.
When trading resumed the next day, most of the loss was instantly erased.
The same pattern unfolded Thursday, as shares in companies including Procter & Gamble fell precipitously.
“We need to work out a common consensus as to how markets react when stock prices start to plunge in very short time periods,”
said Richard G. Ketchum, the chief executive of the Financial Industry Regulatory Authority, the industry group that polices brokers and exchanges, in this article from the New York Times.
Asked why exchanges had not already agreed on such rules, Mr. Ketchum responded: “I can’t say that I have a good answer for that. We should have. And now we must.” …
But experts say such safeguards make sense only if they are applied uniformly.
When the New York exchange suspended trading Thursday, sellers simply moved to other exchanges with fewer restrictions. [br]
In some cases, the supply of buyers on those exchanges already had been exhausted, causing the computerized trading programs to offer shares at lower and lower prices.
Some of the resulting downward spirals ended at one penny.
“When the New York Stock Exchange went into slow motion, a system designed to stabilize trading actually backfired in practice,”
said James J. Angel, a professor at Georgetown University who studies financial markets.
“No exchange should have an independent circuit breaker.”…
Other countries, like Germany, impose similar circuit breakers on trading in shares of any individual company that has a similar drop, but the S.E.C. has never done so.
A former S.E.C. official said the possibility had been discussed in recent years, but “I don’t think there was quite the urgency to deal with it.” …
But there are other ideas to keeping computerized markets in check.
Lawrence E. Harris, a finance professor at the University of Southern California, said regulators should simply require all sellers to specify a minimum price below which they do not want to complete the sale of their shares.
Market orders, placed at the best available price, can be too risky in the fast-moving age of electronic trading.
“Electronic exchanges in most other countries only accept limit orders,” said Professor Harris, a former S.E.C. chief economist.
“Without any mechanisms to stop the market, we just had stocks falling through the ice.”
But Rafi Reguer, a spokesman for the electronic exchange Direct Edge, said retail investors liked market orders because limit orders could be rejected, forcing the seller to try again, in some cases at a lower price.
“Sometimes what people value is the certainty of execution,” Mr. Reguer said.
Experts also note that the value of limit orders can be subverted if investors routinely set unrealistically low limits, to avoid the inconvenience of having their orders rejected.
The BATS Exchange, a large electronic exchange based near Kansas City, rejects orders if the price would be more than 5 percent or 50 cents away from the last completed transaction.
During the market panic on Thursday, between 2:40 and 3 p.m., BATS prevented more than 47.6 million orders from executing — more than 95 percent of all orders during that period, according to Randy Williams, a spokesman for the company.
