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A year after the 'mini flash crash,' changes cut trading halts on volatile days

A trader works on the floor of the New York Stock Exchange (NYSE) on August 24, 2015 in New York City.
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A trader works on the floor of the New York Stock Exchange (NYSE) on August 24, 2015 in New York City.

It's been a year since the Aug. 24 "mini flash crash," when the Dow sank more than 1,000 points at the open.

While there was a fundamental reason for the skid — the sudden devaluation of the Chinese yuan —the drop was exacerbated by several problems with the way stocks trade.

It was a day characterized by 1,278 trading halts that caused considerable problems in the opening minutes of trade.

Fast-forward to June 24, 2016, the day the Brexit vote was announced : another market surprise — another big-volume, big-volatility day. The Dow also opened down, though only about 600 points.

Except this time, there were only 68 trading halts.

Two big, surprising events that caught traders by surprise — with one, 1,278 trading halts, the other, 68 trading halts.

It's not an accident. In the last several months, market participants, but particularly the major exchanges (BATS, ICE/NYSE, and Nasdaq) have made some headway toward making markets function more smoothly when they are under a lot of stress. And they are considering more changes.

There has been progress in two key areas:

1.) Reducing delays in opening stocks. The basic idea is simple: Stocks should open as quickly as possible. Only about half of S&P 500 stocks were opened on the NYSE by 9:35 a.m. on Aug. 24. This caused difficulties getting a correct price for the S&P 500 and for ETFs as well.

What has the industry done? In July 2016, the NYSE issued new rules that permit more NYSE stocks to open "automated," that is, without having a designated market maker manually open the stock, though they retain the discretion to open stocks manually if warranted.

On Brexit day (June 24), the vast majority of NYSE stocks opened promptly. That drastically reduced the problems with pricing ETFs and major indexes that occurred last Aug 24.

2) Reducing trading halts. Remember that stat from above: Even after stocks opened on Aug. 24, there were 1,278 trading halts for 471 different ETFs and stocks.

After the 2010 Flash Crash, the entire industry created individual stock circuit breakers, known as "limit up, limit down" that halt trading in individual stocks for five minutes when they move more than 5 percent in a rolling five-minute period (the band is widened to 10 percent in the first 15 minutes of trading).

These circuit breakers have worked well, but the extreme number of halts that day caused many to consider whether there were "tweaks" that would reduce the number of halts.

Without getting too complicated, they have changed how they reference the price for how the trading bands are calculated. Since the implementation, there has been an approximately 75 percent reduction in trading pauses, according to the NYSE.

Market participants are looking at other tweaks to the limit up, limit down system. The basic idea is to keep stocks open and avoid halting them. Here's one idea floating around: Don't halt stocks at all, just create trading "pauses." If a stock trades down 10 percent, let's say from $100 to $90, let it stay there for some period of time, say four minutes. During that time, it can trade at $90 or above, but not below. If after four minutes it doesn't move off of $90, don't halt the stock, just re-adjust the bands. Now it has to trade down another 10 percent before it can be "paused."

But I'm getting ahead of myself. A week and a half ago, the exchanges issued a rare joint press release to announce some of the changes they are seeking. You can read it here.

Bottom line: None of this means that the market can't go down. But it does mean that "market structure" might be less of a factor in causing problems than it has in the past during volatile periods.

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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