In an attempt to obviate another August 24 mini-flash crash in exchange traded funds, the New York Stock Exchange wants to make some structural changes and eliminate the so-called Rule 48 that came under fire during the market volatility.
According to a spokesperson, the NYSE is seeking to shelve Rule 48, which would allows market makers on the trading floor to avoid a time-consuming process of opening stocks during volatile conditions, reports Nicole Bullock for Financial Times.
“Rule 48 is no longer relevant in the opening procedures we have proposed,” Stacey Cunningham, NYSE’s chief operating officer, said at a meeting of the Equity Market Structure Advisory Committee.
The NYSE invoked Rule 48 multiple times to prevent panic trading during market open in late August. The relatively new rule allows stocks to open without price quotes ahead of time to allow a more orderly stock market open when there is expected to be large price gaps.
However, some are blaming the rule for the 1,278 circuit breakers, or imposed trading halts, that were enacted across major averages after shares fell to various levels. With many securities stuck in a holding pattern, the diminished transparency into pricing may have affected market makers’ ability to calculate at what price to step in – market makers help keep ETFs trading near their net asset value, but without the necessary transparency into underlying security prices, the market makers opted to step back and wait for more precise numbers to come in.
Consequently, ETF prices plunged lower as orders failed to get filled on early August 24, with ordinary investors wondering what was trading and whether they received the correct price on trades.
The SEC commissioner Dan Gallagher previously stated that the regulatory body would “absolutely” look into ETFs and Rule 48 in response to the irregular blips. [ETF Mini Flash Crash Causes SEC To Rethink New Rules]
NYSE intends to outline plans for regulators to change existing rules to enable its market makers to provide more information to participants on volatile days and to open the market in a more timely manner. The changes were recommended as a result of a McKinsey study.
Many have been quick to blame ETFs as the main culprit to the spike in volatility in late August. Others pointed to structural issues, like Rule 48, that set up ETFs to fail.
“We saw some big industry personalities questioning the real impact of ETFs and suggesting that they posed a systemic risk,” Deutsche Bank said, according to ValueWalk. “Most of the reasons behind the events that took place on August 24th were related to market volatility, market structure issues, or an inadequate usage of market orders; none of which was specifically an ETF-induced problem.”
Max Chen contributed to this article.