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Morgan Stanley, Citadel, & BlackRock Now Advising The SEC On Changes To Circuit-Breaker Rules

Courtesy of ZeroHedge View original post here.

Who better to help the SEC determine the market’s circuit breaker rules than Morgan Stanley, BlackRock and Citadel Securities? After all, what vested interest could they have in tilting the playing field in their own direction?

But, alas, they are among the names who have reportedly made up a “loose task force” on helping determine when and how market circuit breakers should be implemented, according to the Wall Street Journal. And apparently, the group isn’t happy with how the market’s circuit breakers worked back in March.

The SEC has taken calls with the group, hearing them out on the idea that market circuit breakers shouldn’t happen right after the open because it does away with the whole point of opening the market to begin with. In March, 3 or 4 times that circuit breakers were implemented it occurred within minutes of the open. On March 16, for instance, the market was halted one second after the 9:30am open.

The “task force” (lobbying group?) has suggested that the rules be modified for the first 15 minutes of the trading day. One idea is to allow trading to open 7% lower, if necessary, but hold off on halts until the S&P hits another threshold. The group has yet to come to a consensus on a definitive rule change. 

The SEC would have to approve any revisions as part of a lengthy process that would be open to public debate. The task force says it plans on “studying data” from March before making any recommendations. 

Brett Redfearn, director of the SEC’s division of trading and markets, said: “The SEC is pleased that different players in the industry are working together to assess how our market structure regulatory mechanisms have worked in real market conditions, and whether any changes might be warranted.”

The task force was formed last year, before the pandemic happened, and held “several” calls during March. Another topic they are trying to tackle is dislocations between S&P 500 futures and the SPY ETF. “Gaps can appear” between the two if there are sharp moves overnight, WSJ notes. We’d guess that if they looked deep enough into the S&P 500 futures trading, they may find out some peculiar reasons for these dislocations…

During overnight futures halts, the SPY ETF continues to trade.

The debate remains how the market can best “protect” investors from crashes (by not allowing them access to trading?) while still giving people time to pause and digest fast-moving information.

Circuit breaker rules first came into effect after 1987′s Black Monday and were modified after 2010′s Flash Crash. The current rules mandate that a 7% drop in the S&P 500 triggers a 15 minute halt, a 13% drop halts trading for another 15 minutes and a 20% drop halts trading for the rest of the day. The CME has resisted changing its 5% overnight limits on futures. 


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