By Chris Dieterich
NEW YORK--A sharp drop that drove Anadarko Petroleum Corp.'s
(APC) to a penny in the last second of trading Friday exposes a
vulnerability in trading rules adopted last month to curb sharp
stock swings.
Andarko's stock fell from over $90 a share to as low as one
penny in fraction of a second and then recovered, closing up $2.22,
or 2.5%, to $90.03, according to FactSet. NYSE Euronext (NYX)
canceled all trades executed below $87.56 that took place between
3:59 p.m. EDT and 4:00 p.m., according to an alert sent to traders
at 4:42 p.m.
Last month, exchanges launched a framework to curb sharp stock
swings. The so-called limit-up/limit-down system does away with
single-stock circuit breakers set up by the Securities and Exchange
Commission in the wake of the "flash crash" on May 6, 2010, when
the Dow Jones Industrial Average fell nearly 1,000 points in a few
minutes.
Limit-up/limit-down is designed to prohibit wild price swings by
allowing defining valid trades only in within certain price bands.
For Anadarko and other large stocks, the range is 5% above or below
the stock's five-minute moving average.
But the rules didn't take hold Friday because the one-year pilot
program is rolling out in phases, and doesn't apply to stock moves
that take place in the final 30 minutes until Aug. 1, according to
the SEC.
"One of the gaps in limit-up/limit-down is that it does not
apply in the last 30 minutes," said James Angel, a professor of
finance at Georgetown University. "We have so many contracts tied
to closing prices that you've got to get it right: mutual fund
pricing is based on the close, as is the value of your
account."
The new limit-up/limit-down rules did away with NYSE's own
program to curb swings on its own exchange. So-called "liquidity
replenishment points" were removed by NYSE at the request of the
SEC. NYSE criticized the SEC for ending the program, saying that
they benefited investors.
"We believe this occurrence is an unintended consequence of the
new limit-up/limit down rules and the absence of our LRPs,"
according to a NYSE spokesman.
Write to Chris Dieterich at
christopher.dieterich@dowjones.com
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