Progress Energy Circuit Breaker Halt Exposes System Flaw

Bob Pisani is off; this post was written by CNBC producer Robert Hum.

Progress Energy was halted for 5 minutes due to single-stock circuit breaker rules at 12:57pm ET. But were those circuit breaker rules completely effective? Perhaps there are still some flaws in the system…let’s take a look at what happened this afternoon, in a situation the markets haven’t seen in previous single stock circuit breaker halts.

Remember, per the circuit breaker rules, if a stock moves 10% or more within 5 minutes, trading of that stock is halted for 5 minutes across all markets.

At 12:57:21, Progress Energy traded at $44.60. In theory, trading should have been halted if a trade was executed below $40.14 (10% below $44.60) with 5 minutes.

21 seconds later, at 12:57:42, Progress Energy broke below $40.14. However, in subsequent MILLI-seconds, dozens of trades were still being executed well below $40. Most of the trades occurred on the Nasdaq, with multiple trades occurring at $39, $38…then $34, $33, $32, $31, and $30…before 6 even lower-priced trades occurred (1 trade each at $29.75, $27.00, $22.00 followed by 3 trades at $4.57).

Milliseconds later, the stock bounced back, with several trades executed between $43 and $44 — all this happening before a circuit breaker was tripped.

In the end, it took 5 milliseconds after shares fell below $40.14 before circuit breakers kicked in, allowing numerous trades to be executed within that split-second period.

So what happened? Why did so many trades get executed after the stock traded 10% below market?

Once the stock hit $40.14 (10% below market), trading was immediately halted on the stock’s primary exchange, the NYSE. As the primary lister of those shares, the NYSE (as required) then sends a message out to all other markets to halt trading. However, by the time those markets got the message and halted trading, dozens of trades occurred. Remember, this is all happening very fast…in milliseconds.

No word on whether Nasdaq will cancel some or all of the Progress Energy trades that were executed this afternoon, but today’s trading patterns in Progress Energy exposes a system flaw related to how the current circuit breaker rules are triggered.

In today’s markets, trading occurs EXTREMELY fast, and it’s a problem if trading can’t be halted systemwide at the same exact instant. Quite clearly from today, in the milliseconds it takes for a primary lister to send a message to other markets to halt trading, dozens of trades can be executed on secondary exchanges before the full halt is triggered.

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