SIFMA submitted supportive and constructive comments to the Securities and Exchange Commission regarding a proposed plan submitted by various self-regulatory organizations (SROs) to address issues of extreme market volatility experienced in the May 6, 2010 market disruption commonly referred to as the Flash Crash.
“Investor confidence in our markets and their efficient functioning is critical for capital formation, economic growth and job creation,” said Randy Snook, executive vice president at SIFMA. “In the wake of the Flash Crash, regulators, the exchanges and market participants came together to find quick and workable solutions to extreme market volatility. Our comments today should move us forward in finalizing these efforts to adopt workable safeguards against such extreme volatility, while still allowing markets to function properly and efficiently.”
In its letter to the SEC, SIFMA cited its general support for the plan noting that it should help prevent extreme price swings and stock price dislocations. The association also offered comments suggesting specific changes it felt should be made to enhance its effectiveness.
Specifically, SIFMA’s comments focused on the following:
- Transactions That Should be Excluded from the Proposed Plan. While SIFMA agrees that the proposed plan should be helpful in addressing extraordinary market volatility events, SIFMA also believes that trading that clearly cannot or is not designed to affect the volatility of the markets should be permitted whenever possible.
- Trading at the Close. SIFMA noted that during the implementation of Phase I of the proposed plan, price bands will not be disseminated less than 30 minutes before the end of regular trading hours, and trading will not enter a Limit State less than 25 minutes before the end of regular trading hours. The Association believes this framework should apply to the proposed plan generally.
- Limit State Time Period. SIFMA believes that the SROs should reconsider and amend the proposal so that the time period allotted under the proposed plan for certain stocks to exit a Limit State is reduced from 15 seconds to five seconds.
- Order Handling Obligations. SIFMA also believes that the SEC and the SROs must specify the obligations of broker-dealers and member firms handling “held” customer orders once the proposed plan has been approved. The ability of broker-dealers to delay, reprice or reject held orders consistent with the Commission’s limit order display rule, as well as the best execution obligations of broker-dealers more generally in such circumstances, should be clearly set forth by regulators.
- Clearly Erroneous Trades. SIFMA believes that the adoption of the proposed plan should cause the reevaluation of SRO clearly erroneous trade rules. SIFMA has recognized the need for uniform rules that provide consistency with respect to when it is appropriate for markets to break trades. At a minimum, SROs should amend their rules so that the strong presumption is that trades executed within a price band are not subject to “busting” or other adjustments. SIFMA also noted that, unlike equity markets, options exchanges do not have consistent clearly erroneous trade rules. In light of this, SIFMA believes consideration should be given to how disputes regarding options transactions that may occur during a trading pause will be resolved.
- Plan Governance. SIFMA also believes that the proposed plan’s governance structure should be broadened and made more transparent.
SIFMA also raised in its letter to the SEC regarding the proposed plan certain other considerations, including those regarding:
- Trading at the open;
- Price band thresholds;
- The need for SRO guidance;
- Importance of valid market data; and
- The compliance date and evaluation of the Pilot.
The letter can be found at the following link: http://www.sifma.org/issues/item.aspx?id=26045
