NYSE Proposes Actions to Improve the Stability of the Exchange Markets
Commentary by Steven Lofchie
The NYSE proposed a number of actions that are intended to "improve the stability" of the exchange markets in adverse environments while at the same time "maintaining the efficiency of trading." Its proposals and suggestions are part of a response that began with its study of the flash crash on August 24, 2015.
Areas proposed by the NYSE for action and study included the following:
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disseminating order imbalance information until a security opens;
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discontinuing the acceptance of stop-loss orders;
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widening market collars for opening and reopening auctions;
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expanding maker exemptions from Reg. SHO; and
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revising the rules that pertain to "clearly erroneous trades."
The NYSE stated that it expects "better outcomes due to structural changes, along with increased preparedness of participants." The structural changes include increasing (i) the availability of liquidity by "removing the fear of 'cancelled trades'" due to erroneous trade rules and expanding harmonization across markets and (ii) the "guardrails provided by broker-dealers" in order to achieve improved outcomes for retail investors. The NYSE acknowledged that "[t]he proposed solutions will not be a panacea for all of the challenges of broad-market volatility." The NYSE also suggested areas of further study.
Commentary
The NYSE's most interesting proposal was for stop-loss orders (which the NYSE acknowledged come largely from retail investors) not to be accepted during times of market downturn. This effectively would prevent retail investors (who cannot watch the markets interminably) from selling automatically when institutional investors (who always watch the markets) sell deliberately. It is reasonable to argue that this would protect retail investors by limiting their ability to cause, or sell into, market panic that is likely to be followed by a rebound. On the other hand, if the markets really are crashing and not just behaving strangely before a correction, then prohibiting stop-loss orders will cause retail investors to remain stuck in the market while institutional investors are able to sell out. As well intended as this prohibition might be, it also is likely to hurt retail investors. It is simply untrue that the right way to "protect" retail investors is to deprive them of the ability to trade – especially when others still are able to do so.