Trader Talk

SEC's (Probable) Plan for NYSE, Nasdaq


NYSE and Nasdaq meets with the SEC. The SEC has two choices: 1) scrap the system whereby the NYSE (and Nasdaq, if it chose to do so) can go to a slower market, even if for only a few seconds, or 2) require all market participants to follow the primary market maker (Nasdaq or NYSE) when they slow trading in volatile markets — to have uniform rules for circuit breakers.

My bet, based on discussions with market participants, is: 2). The SEC will modify Reg NMS to require other exchanges to follow the primary market maker when they slow trading.

The reason: it will be sold as investor protection, and everyone understands that IF there are circuit breakers in place, they should be the same for all participants.

Most traders believe this was the core of the problem last Thursday: stocks traded away from the NYSE when trading was slowed in many stocks, even for a few seconds, into markets where there was little if any liquidity.

High-frequency trading systems appear to have cancelled bids all the way down as they saw prices dropping.

As Art Cashin pointed out this morning, nothing sold for a penny on the NYSE last Thursday. Accenture went from $40 to $0.01, Boston Beer went from the $60s to $0.01...but not on the NYSE floor.

What about Nasdaq? In 2008, the SEC approved Nasdaq's request to establish an "Imbalance Cross" that was essentially the same concept as the individual stock circuit breakers (liquid replenishment points, or LRPs) that are in place at the NYSE: it would allow the Nasdaq to slow trading in a stock for a 60-second period to seek orders on the other side.

It was never implemented by Nasdaq. At the time, the SEC said that adopting the Imbalance Cross would "promote fair and orderly markets and the protection of investors."

NYSE COO Larry Lebowitz is testifying tomorrow in the House Capital Markets Committee about what happened last Thursday as well.

What are LRPs? A brief primer.

1) LRPs came in at the NYSE several years ago in response to Reg NMS, which required the NYSE to be accessible to electronic trading. The NYSE also wanted to continue to be able to create slower markets when market volatility was high.

2) LRPs kick in when a trade is a significant percentage above or below the prior trade; the exact percentage varies depending on the price and average daily volume of the stock.

3) When the LRP kicks in, the designated market maker (DMM, the former specialist) on the floor of the NYSE slows trading for a few seconds; if the stock has moved down, he or she is seeking bids (orders to buy) on the other side; if going up, seeking offers (orders to sell).

4) Over time, the parameters for the LRPs have been widened and the time periods have been shortened. On any given day, there may be 100 times when an LRP is hit at the NYSE, most for a period of seconds. Even on May 6th, when over 1,000 LRPs were hit (some stocks hit LRPs several times) the average LRP was for 40 seconds.

Stats: Stocks, VIX, Gold

Europe closed near the highs for the day, with Spain up 14 percent, UK up 11 percent, France up 9 percent, Germany up about 5 percent, Greece up 9 percent.

U.S. maintaining most of its gains, even though the euro is coming off its highs. CBOE Volatility Index (VIX), which opened at 28 (from 40), has moved up late morning to about 29.

Gold sitting right near 1,200.

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