From global shocks like Coronavirus and oil price fluctuations, market participants must always be prepared for unanticipated volatility. There is a comprehensive range of actions, rules and market mechanisms that aim to prevent extreme price dislocations and temper extraordinary volatility. These important innovations aim to deliver tangible benefits to market participants, liquidity providers and global investors. The following are a few of the most significant protections in place.
Market-wide circuit breakers are important, automatic mechanisms invoked if markets experience extreme broad-based declines. They are designed to slow the effects of extreme price movement through coordinated trading halts across securities markets when severe price declines reach levels that may exhaust market liquidity.
Market-wide circuit breakers may result in a temporary trading halt, or under extreme circumstances, close the markets before the normal close of the trading session.
Limit Up-Limit Down (LULD) is a mechanism designed to mitigate extraordinary market volatility and extreme price movements in individual securities. LULD prevents trades in individual securities from occurring outside specific price bands that update continuously throughout the trading day.
The price bands for each security are set at a percentage level above and below a reference price (generally the average trade price over the immediately preceding five-minute period).
Primary Listing Exchanges that run electronic re-opening auctions have amended their automated auction trading rules to provide for harmonized procedures for extending the Trading Pause and a concurrent widening of their auction price collars every five minutes.
Trading collars are parameters that prevent trades from executing outside of a designated price range. Exchanges apply trading collars to a range of potential executions, including both auctions and market orders received during the continuous trading day.
Limit Order Price Checks reject limit orders that are priced too far away from the prevailing price of the security.
The Closing Auction is the last event of the core trading day, and it’s important because it determines the Official Closing Price for each security.
Following a market disruption or trading halt on a primary listing market, all U.S listing exchanges have worked together to develop a contingency closing auction procedure to govern an alternate method of establishing an official closing price. For example, in the event that a disruption prevents Nasdaq from conducting a closing auction, pursuant to such rules, Nasdaq could designate NYSE Arca to perform that function, and vice versa.
As part of an industry-wide initiative, the NYSE shortened its settlement cycle by one day, with the aim to reduce certain risks in the clearance and settlement process, including credit, market, and liquidity risks for central counterparties, their members, and other market participants.
In implementing this change, the NYSE further simplified its rules and eliminated acceptance of any non-regular way settlement instructions.