Schapiro: No Concrete Plan to Alter Erroneous Trade Rules, After Knight Debacle
October 23, 2012
NEW YORK -- The Securities and Exchange Commission is not considering any changes to the “clearly erroneous” trade rules that could respond to the type of flood of incorrect orders sent onto the nation’s stock markets August 1 by market maker Knight Capital.
"We will always be revisiting rules after particular experiences,'' if there is concern about how the rules are working, chairman Schapiro told Securities Technology Monitor at the annual meeting of the Securities Industry and Financial Markets Association here. "But I wouldn't say there is anything concrete planned," after the Knight incident.
A “large software bug” triggered “dormant" computer code to start emitting erroneous orders at the outset of trading on the first day of August, according to Knight chief executive Tom Joyce.
The flood of erroneous orders cost Knight $457.6 million and Knight’s shareholders 70% of their equity in the firm. A consortium of other market firms, led by Jefferies & Co., rescued Knight.
"While I know it was painful for Knight's shareholders and for Knight's management, there was not a good reason to socialize the losses from their technology mistakes broadly through the markets,’’ she said. “They needed to be able to bear those costs themselves.''
The “important message” from the Knight case, she told SIFMA’s members, “comes from the fact that when we said that the rules that govern when trades can be broken, the clearly erroneous rules, would stand and that we are not going to go beyond those rules and allow trades to be broken,’’ under other terms.
After the flash crash of May 6, 2010, the SEC proposed rules for exchanges that trades would be broken at specific percentages away from a reference price. These are part of single-stock circuit breaker provisions of national exchange rules:
• For stocks priced $25 or less, trades would be broken if the trades are at least 10 percent away from the circuit breaker trigger price.
• For stocks priced more than $25 to $50, trades would be broken if they are 5 percent away from the circuit breaker trigger price.