Within seconds of the opening bell Thursday, shares of American
Electric Power Co. (AEP) collapsed 54%, trading as low as $22.28
after opening the day at $48.18. Moments later, the stock was back
near $48.
The New York Stock Exchange dubbed the deep-discount trades
"aberrant" after investigating, but it canceled none of them. The
exchange didn't comment further.
The decision could have left investors who sold the power
company's stock at the "aberrant" low levels with large losses.
The episode underscores the vulnerability of stock investors in
an age when market malfunctions seem commonplace and renews
questions about how stock investors might be protected from
technical mishaps.
Traders see irony in the swings in American Electric--as well as
second stock Thursday, NextEra Energy Inc. (NEE), and last week in
Anadarko Petroleum Co. (APC) as the wild action comes just a month
after the launch of a program designed to prevent them. The catch
is that the program doesn't cover the start and end of trading for
now. It won't cover the full day until Aug. 1.
The new rules also meant the end of the NYSE's own system to
curb swings for stocks listed on its exchange. An NYSE spokesman
wouldn't comment further on Thursday's trading, but last month the
company said it believed its previous program delivered "concrete
benefits to investors' in a comment letter to the Securities and
Exchange Commission.
The new effort involves importing trading limits used in other
financial markets to prevent big, erroneous stock swings.
The trading curbs, called limit-up/limit-down, are part of a
one-year pilot program undertaken by U.S. exchanges and regulators
amid fierce debate about the vulnerabilities of high-speed and
fragmented markets three years after the May 2010 "flash
crash."
Under limit-up/limit-down, stocks are permitted to trade only
within certain price bands.
"We've got limit-up/limit down to address single-stock
volatility, but it's not in place right now to address the market's
most volatile times," the opening and closing minutes, said Richard
Steiner, head of market structure at RBC Capital Markets.
While the gradual rollout gives market participants a chance to
get used to the new rules, "this limbo state is less than ideal,"
Mr. Steiner said.
The new rules do away with so-called single-stock circuit
breakers set up by the SEC in the aftermath of the so-called flash
crash, the violent market drop on May 6, 2010, when the Dow Jones
Industrial Average fell 700 points in eight minutes, before
recouping much of the loss.
The most widely traded stocks are only allowed to trade in a
range that is 5% above or below the average price over the past
five minutes. So if the average price of a stock is $100, then
trades can be executed between $95 and $105. The price bands are
wider for smaller stocks.
A 15-second countdown begins if a stock's quote breaches either
boundary; if the quotes move back within the permissible bands,
trading continues. If not, a five-minute trading pause results.
The pilot also includes revamped market-wide circuit breakers,
which would shut down all stock trading for 15 minutes after
declines of as little as 7% in the Standard & Poor's 500-stock
index.
These circuit breakers would have kicked in during the flash
crash, whereas the previous system, which required at 10% drop in
the Dow Jones Industrial Average, didn't.
"In some ways, limit-up/limit-down replicates what a human would
have done on the trading floor in a volatile market," said Richard
Gorelick, chief executive at high-frequency trading firm RGM
Advisors LLC. "That's to pause and get clarity on market prices
before executing trades."
Mr. Steiner said the new curbs have so far worked when put to
the test. He pointed to trading in MBIA Inc. (MBI) on May 6, when
the stock shot higher after the company settled a long-running
dispute with Bank of America Corp. (BAC) over faulty
mortgage-backed securities. MBIA's shares rose sharply and faced
multiple trading pauses.
But quirks have emerged, including halts in infrequently traded
securities like the PowerShares DB Base Metals Long ETN (BDG),
which has been halted early in sessions in which it hasn't even yet
traded. The halts are triggered because the system is based on
moves in price quotes--or offers to buy and sell--not actual
trades.
And many in the market want to see more evidence before giving a
final verdict.
"The framework looks like what we wanted to see in order to curb
short-term volatility spikes, but it isn't battle-tested," said
Jose Marques, global head of equity electronic trading at Deutsche
Bank.
Write to Chris Dieterich at christopher.dieterich@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires