Market Wide Circuit Breakers – How Coronavirus Opened the Door for Improvement

With the recent uptick in volatility, the Market Wide Circuit Breakers (MWCB’s) have come to the forefront. Prior to last month, the trading halts -- aimed at minimizing significant intraday market declines by pausing trading across equities and equity-linked options and futures -- had not been triggered since FINRA and the U.S. equity exchanges adopted the current rules in 2012.

With recent COVID-19-related volatility, we now have experiences to gauge how the current MWCB protocols worked. While the markets overall performed exceptionally well under stress in March 2020, the Level 1 MWCB was triggered on multiple days in the minutes immediately following the 9:30 a.m. start of the regular equity trading session. In each of these 3 instances -- March 9, 12 and 16 -- trading was halted for 15 minutes as a result. We believe there is room for improvement and have outlined at the end of this article several suggestions that we believe could help optimize the process.

The sharp price decline in the major indices, including the S&P 500®, (on which the MWCB’s are based) was well known pre-open on these days. The S&P 500® index futures were trading limit down (-5%) and the widely-tracked S&P 500® ETF (SPY) was trading down even more. This is important because a key rationale for the MWCB halt is to allow time for market participants to digest news and to “let cooler heads prevail” in an effort to help draw buyers into the market to reduce the severity of the selling pressure.

We believe that when it is clear from pre-open trading levels of the SPY that a Level 1 halt would likely be triggered shortly after 9:30 a.m., the Level 1 threshold should not be in effect. This would allow trading to continue uninterrupted, unless the S&P 500® were to decline to the Level 2 threshold (-13%). It is important to note that a MWCB halt can only be triggered once per dayⁱⁱⁱ, so eliminating the Level 1 halt in these circumstances merely expedites this level being removed, albeit forgoing the associated 15 minute trading pause.

As it stands now, the MWCB’s have 3 levels for declines^iv:

A market decline which results in a Level 1 or Level 2 halt after 9:30 a.m. and before 3:25 p.m. would halt market-wide trading for 15 minutes, whereas a similar market decline at or after 3:25 p.m. would not halt market-wide trading^v.

A market decline which leads to a Level 3 halt, at any time during the trading day, would halt market-wide trading until the listing market opens the next trading day^vi.

RBC's Suggestions:

In this instance, the first MWCB Level would be Level 2, down 13%.

This would provide institutional investors more time to discuss what orders to put in place and at what price levels to participate at with their portfolio managers when markets are down significantly. This could be particularly helpful in an environment such as the current one, where employees are physically separated and communication is more cumbersome and time consuming.

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ⁱSEC Commissioner Elad Roisman: Meeting with Representatives from RBC Capital Markets - The topics discussed included the Commission’s proposed Transaction Fee Pilot for NMS Stocks

Comment Letter - CTA/UTP Conflicts of Interest Policy

Comment Letter - Proposed Rule to Establish a Transaction Fee Pilot for National Market System Stocks

Comment Letter - Rescinding the Effective-Upon-Filing Procedure for NMS Plan Fee Amendments

Comment Letter - Market Data and Market Access

ⁱⁱMeeting with SEC Commissioner Allison Herren Lee - Discussion on the proposed rulemaking relating to a Transaction Fee Pilot

Meeting with the SEC Division of Trading and Markets - A portion of the discussion concerned Cboe EDGA’s proposed rule change to introduce a delay mechanism on EDGA

Meeting with SEC Commissioner Kara Stein - Topics discussed include the proposed Rule on Disclosure of Order Handling Information

Meeting with SEC Commissioner Hester Peirce - Among the topics discussed were equity market structure issues, including the proposed transaction fee pilot

Meeting with the SEC Division of Trading and Markets - Discussion concerned, among other things, the proposed rulemaking relating to a Transaction Fee Pilot

Meeting with Giles Cohen and Neil Lombardo, counsel to SEC Commissioner Aguilar - The discussion included, among other topics, equity market structure

ⁱⁱⁱ https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-circuitbreakersbulletinhtm.html

^iv https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-circuitbreakersbulletinhtm.html

^v https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-circuitbreakersbulletinhtm.html

^vi https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-circuitbreakersbulletinhtm.html