US exchanges unite to try and stop a repeat of August 2015 flash crash

The three big stock exchanges in the US are working together to try and avoid a repeat of the latest significant flash crash, which occurred almost a year ago on 24th August 2015. The S&P 500 had been open just a few minutes and it was already down five per cent. Within a few hours, the losses had almost entirely been clawed back. But it was an anxious wait, a cautious reminder that the temperament of modern electronic markets can change in the blink of an eye. 

There was more than one contributory factor. But the key elements seem to have been low liquidity, while traders felt somewhat jaded after high selling in Asia that morning and a week of big losses before.

As the SEC said: “August 24th reminds us that we live in a world of increasing volatility, as technology and many other dynamics impact capital markets from equities to fixed income. For example, it was only a year ago that we experienced the Treasury ‘Flash Rally’ on October 15, 2014. With the recognition that moments of high volatility and discontinuous pricing may be a persistent aspect of today’s markets, we see a need for market participants, exchanges, and regulators to improve the US equity market’s ability to cope with extraordinary volatility.”

Enter stage right, BATS, NASDAQ and NYSE, the three heavyweights on the US sock exchange scene, who have got together and agreed a set of harmonised rules to deal with such incidents, or indeed halt trades during another future flash crash. 

As Finextra explained, the plan focuses on four key areas:

  1. To reduce the length of time in which securities could change without Limit Up/ Limit Down (LULD) bands being in place.
  2. To reduce the number of trading pauses.
  3. To standardise the primary exchange automated re-openings following a trading pause.
  4. Elimination of Clearly Erroneous Execution (CEE) rule when LULD bands are in effect. 

Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research, said in a note: “While executives at the three exchanges laid out the improvements made to the securities market, it remains unknown what the next unexpected event will be to cause extreme volatility. Yet efforts by the exchanges have limited the likelihood that something like August 24 will have a similar impact on stocks and ETFs."