Exam Alert: FINRA implements pricing limits to prevent extreme volatility in NMS stocks

Effective April 8, 2013, FINRA and other SROs will put into effect a plan to address extraordinary volatility in the stock market, such as what happened during the flash crash of 2010. The plan prevents trades in an NMS stock from being executed outside of a specified threshold of the average price of trades in the stock over the past five minutes. Continue reading

Effective April 8, 2013, FINRA and other SROs will put into effect a plan to address extraordinary volatility in the stock market, such as what happened during the flash crash of 2010. The plan prevents trades in an NMS stock from being executed outside of a specified threshold of the average price of trades in the stock over the past five minutes.

If the national best bid goes below the lower threshold or the national best offer goes above the higher threshold (but the other side of the market is within the threshold), the quotes for the stock enter a “straddle state.” When the quotes are in a straddle state, the primary exchange that lists the stock may pause trading in the stock.

If both sides of the market go either at or above the higher threshold or at or below the lower threshold, the quotes inn the stock enter a “limit state.” If the quotes remain in a limit state for 15 seconds, then the primary listing exchange for the stock must pause trading in the stock for five minutes.

The thresholds are as follows:

Average price over the past 5 minutes Threshold
More than $3.00 5%
$0.75 up to and including $3.00 20%
Less than $0.75 Lesser of $0.15 or 75%

These thresholds are doubled within 15 minutes of market open and 25 minutes of market close. Also, a leveraged ETP (exchange-traded product) multiplies the threshold by the leverage ratio of the product.

The plan will be implemented in two stages. The first stage will go into effect April 8, 2013, and will have the plan apply to certain selected NMS stocks. The second stage will go into effect six months later, and will expand the plan to cover all NMS stocks.

FINRA has added a new rule and adopted amendments to other rules to ensure compliance with the plan.

Source: FINRA Regulatory Notice 13-12: FINRA Adopts Amendments Relating to Regulation NMS Plan to Address Extraordinary Market Volatility

This alert applies to the Series 7, Series 24, Series 26, Series 55, and Series 62.

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