Money Managers Welcome Market 'Circuit Breakers"

The people who regulate the equity markets are moving with (for them) light speed on measures to combat, mitigate and decipher any future “flash crash” event. But it’s even more interesting to note the scant amount of resistance from money managers, brokers, traders and other officials most affected. Is such peace and harmony possible on Wall Street?

Regulators, including the SEC and various SROs, such as FINRA and the exchanges, are coordinating efforts to test, for roughly the next six months, a new system of market wide, individual stock “circuit breakers.” These are going to be five-minute time-outs that would be triggered for stocks in the S&P 500 when share prices rise or fall 10 percent in any five-minute period.

Most industry members feel these liquidity meltdown speed bumps are well intended, and that they just might head off another debacle like the one that caused P&G to nearly be taken over by Jim in the Institutional Investor mailroom, and for shares of Accenture to trade electronically for a penny when the last price quoted at the NYSE was around $40.

The NYSE has its own circuit breakers, that can be triggered by 2 percent moves and can last from a few seconds to a few minutes. The Nasdaq is contemplating similiar go-slow triggers, and there’s even protocol already in place going back to 1990 that can halt stock, stock futures and stock options markets when the Dow moves down 10 percentage points in a session; it was last triggered in the late 1990s when the trigger was set in point not percentage moves, which was considered back then to be an acceptable proxy for jaw dropping. That said, the market has never really coordinated such ambitious, proactive volatility intervention.

Hedge funds, an industry that contains controversial high-frequency traders suspected to be at the heart of the May 6 crash, are not putting up much of a fight on the pending circuit breaker pilot program. Stu Kaswell, Executive VP, managing director and general counsel for the Managed Funds Association, which calls itself the voice of the global alternative investment industry but which is best known as the hedge fund lobby, wrote to the SEC to say it applauded the effort, and that it considered a trial period an “intelligent approach.”

A read through some of the other comment letters submitted to the SEC shows that the majority of market participants have no strong aversion to the pending circuit breaker test run. Sure, there are some bonafide quibbles (a lawyer for Knight expressed concern about the overall unsettling direction of artificially trifling with volatility, a market maker’s best friend; and Vanguard is concerned about ETFs not being included in the initial trial) but no one is launching a major protest.

Money Managers Welcome Market ‘Circuit Breakers”

Money managers, brokers and traders are showing little resistance to regualtory measures to combat, mitigate and decipher any future “flash crash” event.