The Problem with Market Trading Halts

Is there a better way to address volatility than the current single-stock circuit breakers? Maybe. AMR was halted seven times today. The single stock circuit breaker kicks in when a stock trades 10 percent above or below the prior day's close for five minutes or more.

There are two problems:

1) the single-stock circuit breaker percent arguably should be adjusted for stocks under $5. So, for example, the circuit breakers should kick in when a stock drops, say 20 percent or more rather than 10 percent. Already, when a stock is below $1 on the prior day, a drop of 30 percent is required before the stock is halted.

2) in volatile periods a better way needs to be found to prevent this see-saw of stocks halting, reopening on the upside, halting again, dropping, halting...you get the idea.

Indeed, the SEC has acknowledged this problem. They are actively studying adjusting the single stock circuit breaker by adopting a "limit up, limit down" rule similar to what is done in futures trading.

Under this plan, stocks with sudden volatile moves would be able to continue trading within bands.

As an example, suppose a stock trading at $10 dropped $1 (10 percent), to $9. Under the current regime, it would be halted for 5 minutes. Under "limit up, limit down" it might not be halted. Instead, it might be allowed to trade above $9, but would not be able to trade below $9. This avoids the disruption of an actual trading halt.

This is already a proposed rule and will likely soon be adopted by the SEC for all exchanges, though the parameters will not be the same as the example I described.

Sell the losers! I noted earlier that the theme of the day was to short companies that are underperforming their sectors, and even a couple of industries underperforming the S&P 500.

That makes sense to the trading community: "Redemption requests came in," one trader said, referring to hedge funds, who had a terrible month in September. "Forced to sell…..sell losers…why not? Better for taxes."

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