So what’s the plan?
That’s what equity market professionals were asking themselves just one week ago when the NYSE experienced a software-induced trading glitch that suspended trading in 199 stocks for approximately three hours. As reported by Markets Media and confirmed by an NYSE spokesperson, trading continued in the affected names on the markets other exchanges and at off-exchange venues as NYSE worked with its software vendor to resume trading. Trading did resume, but many in market were wondering about contingency plans surrounding the calculation of closing prices for the affected symbols should the market close and the bourse’s systems not be repaired.
Was there a plan? Would it be implemented? Is such a plan a good idea?
Hmmm.
After the glitch was resolved, NYSE held a conference call with members about the details of the technology problem. But according to sources, Markets Media learned that closing price calculations were not discussed during the call since trading was restored before 4 pm. Last year, a similar event happened at the NYSE where trading in all listings was halted and the same debate ensued – both publicly and in the cybersphere - was there a plan to calculate official closing prices in the event of a prolonged market disruption?
According to Andrew Upward, head of market structure at Weeden & Co, all five primary listing exchanges do have rules on their books that address that question. But what about the supposed backup plan inked between NYSE and Nasdaq?
“A quick call into NYSE confirmed that the plan is still sitting with the SEC, having been proposed back in March,” Upward told Markets Media. “But the SEC must decide whether to approve, disapprove, or institute proceedings to determine whether to disapprove the plan by June 9. NYSE notes in its proposal that because of the technology changes needed to implement the plan, it may take up to 120 days to implement it following SEC approval. That means that it likely won’t go into effect until October at the earliest, if it is in fact approved.”
According to the NYSE/Nasdaq filing with the Securities and Exchange Commission, if NYSE MKT experiences a systems issue that threatens its ability to conduct a closing auction, and it can’t resolve the issue by 3 p.m. EST, it will announce via email that NYSE Arca (first choice) or Nasdaq (second choice) will conduct the closing auctions in its stocks. The official closing price will then be determined by the back-up exchange according to its rules. Assuming the back-up exchange is operating normally, the official closing price will be the price of its closing auction. But, if the back-up exchange also falls prey to a systems issue and can’t conduct the auction, or if there simply isn’t enough buy or sell interest to produce a successful auction, the back-up exchange will fall back on secondary and tertiary methodologies for determining the official closing price (see attached files for those methodologies).
Similarly, if Nasdaq experiences a systems issue that threatens its ability to conduct a closing auction, and it can’t resolve the issue by 3 p.m., it will announce that NYSE Arca will be conducting closing auctions in its stocks.
Once the official closing price is determined, regardless of how it’s determined, the SIP associated with the primary listing exchange that experienced the systems issue (i.e. CTA for NYSE-listed and NYSE MKT-listed stocks, and UTP for Nasdaq-listed stocks) will disseminate the official closing price with an ‘M’ condition code.
Upward told Markets Media that the SIP Operating Committees have already voted to approve the changes that need to be made to implement their piece of the plan but no action has been taken on NYSE/Nasdaq portion.
“Traders value the liquidity and the sense of fairness that the closing auction provides, as well as the fact that it allows them to always match the official closing price. This plan increases the odds that an auction will take place, so we view it as a worthwhile endeavor,” Upward said. “From a 'safety and soundness' perspective, we’ve seen how useful it is to have multiple exchanges trading the same stocks when one exchange experiences a glitch during the continuous trading session. So it would seem to make sense to try to extend an element of redundancy to the closing auction too.”
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