A number of exchange-traded products were halted today following dozens of halts yesterday—an expected outcome following implementation of a new limit-up/limit-down (LULD) pilot program designed to keep bid/ask spreads on lightly traded ETFs and ETNs from becoming too wide.
The new LULD system, which is likely to be fine-tuned in the coming months, is designed to protect investors from poor trading execution and to address the fact that market makers can’t possibly ensure that all U.S.-listed exchange-traded products be bought and sold with reasonably tight trading spreads—or at least with trading spreads that don’t get ridiculously wide. Wide trading spreads are one of the most underappreciated costs that eat into investment returns.
“It's great,” said Ugo Egbunike, ETF analyst at IndexUniverse. “It’ll keep people from shooting themselves in the foot with blind market orders,” he added, stressing that such halts are a welcome development, even if the trigger does get fine-tuned as the pilot program is evaluated by regulators and the industry.
The system effectively stops trading—even when market makers aren’t looking—meaning that accidents are prevented before they actually wreak serious damage.
Tuesday’s halts, including the SPDR MSCI EM 50 ETF (EMFT) and the Etracs 1X Monthly Short Alerian MLP Infrastructure Total Return ETN (MLPS), follow a total of 48 halts that occurred yesterday. In the end, the 48 halts amount to slightly more than 3 percent of the nearly 1,500 exchange-traded products that are now covered by the new LULD test program.
Crucially, none of the halts on the securities has involved any trades. The halts occurred within the first hour of trading, according to the New York Stock Exchange, home to most of the primary listings of U.S. exchange-traded products.
“The rollout of limit up/limit down is in its initial phase with respect to the expanded universe of exchange-traded products to which LULD applies,” the New York Stock Exchange said in a prepared statement about the halts.
Out With The Old, In With The New
The LULD changes are part of a much broader effort on the part of regulators to make the electronic trading infrastructure that increasingly is coming to dominate modern financial markets more predictable and reliable. The LULD system is replacing the old system of circuit breakers.
Trades in the LULD system aren’t allowed to take place more than a specified percentage above or below the average price over the preceding five-minute period—10 percent on low-volatility days, and under 10 percent on high-volatility days. If prices don’t move away from the specified limits within 15 seconds, the listing market declares a trading pause of five minutes.
The old circuit-breakers safeguard halted trading for five minutes when the price of a stock or ETF moved 10 percent in five minutes.
Changing The Triggers?
Exchanges have been urging regulators to slow down implementation of the LULD system in order to study its effects more closely, with a particular focus on what exactly constitutes the parameters of a low-volume security.
“We will continue to work within established guidelines, and explore with regulators and other markets to address this and other market structure issues going forward,” the NYSE said.
The halts are part of an industrywide implementation that involves other exchanges. But as noted, the NYSE is more affected simply because it has the lion’s share of primary ETP listings.
IndexUniverse’s Egbunike said it’s possible such halts become a regular and much-welcomed feature in ETF trading—emblems of a regulatory regime that’s seeing to it that investors aren’t left out in the cold simply because they want to own a security that isn’t heavily traded and the subject of a lot of market-maker attention.
The latest halts are an expansion of the program launched earlier this year that now includes the less heavily traded ETPs. The entire program now involves virtually all of the 1,500 U.S.-listed ETFs.
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