In a filing earlier this month with the Securities and Exchange Commission, three exchanges heeded the industry’s call to harmonize their rules, particularly as they relate to how securities trade within existing limit-up/limit-down (LULD) bands and how orderly price discovery occurs following a LULD trading pause.Even though these structural details of the equity market often cause a typical investor’s eyes to glaze over, this is a move that should come as music to the ears of investors who were subjected to August 2015’s cacophony of market volatility.
If you were invested in the market then, you may remember that’s when global market gyrations (namely, plunging Chinese equity markets) resulted in a volatile U.S. market open on Monday, August 24, 2015. Many U.S. stocks and ETFs hit LULD bands and incurred trading halts in the first 60 minutes of the opening bell. Bid-ask spreads for ETFs also widened—in some cases significantly—because of the increased volatility and halts of some underlying securities.
The inconsistent application of how and when securities reopened following such halts greatly contributed to the price dislocations individual stocks and ETFs experienced that day.
While the details of the proposed changes need to be evaluated by market participants, Bats Global Markets, Nasdaq, and NYSE Arca are to be commended for their efforts to harmonize their rules, particularly as they apply to LULD. We believe the changes are a positive step towards a more efficient market and would expect them to go into effect shortly after SEC approval. Sweet music, indeed. But, to borrow a term from classical music, we don’t believe this is the coda—the conclusion—to this particular movement.
We believe market structure rules should continue to evolve to meet the needs of the market, and we look forward to working with the exchanges and regulators for the benefit of investors. In the meantime, ETF investors can help themselves during times of volatility by implementing best practices when trading ETFs.
For example, we recommend investors consider using limit orders as a way to safeguard against poor execution in times of market volatility. While market orders ensure a trade will be executed and in normal markets are not likely to result in poor executions, limit orders offer other advantages for investors, providing price control and protection, as well as some trading flexibility.
Exchanges and regulators can improve the composition, but investors may not benefit fully unless they know how best to play their instruments.
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