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Volatile Markets Prompt Calls for Reviews

Market volatility over the past two weeks is prompting calls for a review of several rules implemented in recent years. In some instances, limit up / limit down circuit breakers meant to allow the market to reset in times of uncertainty were not triggered, leading Nasdaq CEO Bob Greifeld to question whether the limits are tight enough. According to Greifeld, “the philosophical argument is, you want the circuit breaker to be the pause that refreshes, but you don't want the circuit breaker to prevent somebody from buying or selling.” Greifeld pointed to circuit breakers in Chinese markets that prevented the market from operating as a counter example that might actually have increased overall volatility.

The events also highlighted on ongoing debate regarding the application of the circuit breakers to ETFs. According to the Wall Street Journal, of the 1,279 trading halts on Monday, August 24, 80% were in ETFs. In an interview on CNBC’s Closing Bell, SEC Commissioner Dan Gallagher questioned whether these circuit breakers should apply to ETFs: "Do we need to differentiate ETFs from common stock when we look at circuit breakers? Do they operate so differently that they shouldn't be just lumped in under the same rule?" He argued that the data from the recent volatility is “hugely beneficial for policymaking at the SEC.”

The New York Stock Exchange also faced criticism for its decision to invoke Rule 48 on several days, which permits exchange officials to declare an “extreme market volatility condition” in the instance that “extremely high market volatility” is likely to have an impact on the ability of market makers “to arrange for the fair and orderly opening,” among other instances.  When the NYSE invokes the rule, the exchange official may temporarily relieve the market makers of disseminating pre-opening indications in a security and relieve trading floor officials from approving prices for the open. As a result“[m]ore than 2,500 NYSE-listed securities had no quotable price at the open at 9:30 a.m. on August 24, according to data from BATS, with more than 800 still not [having] set a price by 9:45 a.m,” according to Business Insider. In contrast, the exchanges operated by BATS and Nasdaq OMX Group started trading at the open. 

According to Craig Viani, vice president of market structure and technology at Greenwich Associates, "[i]n the case of Rule 48, the concept of reducing transparency at the exact moment it is most needed doesn't sync with the egalitarian proclamation of modern market structure regulations." Additionally, delaying the open can cause issues with index pricing, many of which rely on opening prices on a stock’s primary exchange to price the overall index.  "When the stock is not officially open at the primary venue, they use the previous day's close," explained Sayena Mostowfi, principal and head of US equities research at TABB Group. As a result, according to Mostowfi, "[t]he index is priced on stale prices."

In an interview on CNBC’s Closing Bell, SEC Commissioner Dan Gallagher said that the Commission would “absolutely” review the use and effectiveness of Rule 48 in the wake of recent market volatility and noted that the rule was implemented in a time when markets were first changing from manual trading to more automated trading.