BlackRock calls for halting stock market to avoid volatility

The report suggests tweaking the system underlying trading halts, called limit-up/limit-down.

Exchanges typically allow securities to rise or fall by a set percentage but if the stock moves as much as the threshold, trading is suspended to prevent an avalanche of buy or sell orders from creating more extreme price moves. 

At the moment, the limit-up/limit-down price bands double in the first 15 minutes and the last 25 minutes of the trading day, but BlackRock is calling for uniform thresholds throughout the day.

"We believe that this doubling is inconsistent with the objective to address severe price volatility, as the open is precisely the time of day when volatility is greatest and firmer controls are needed," said the paper.

Further work

BlackRock also urged regulators to consider making market opening procedures fully electronic.

While the New York Stock Exchange's hybrid model, in which human traders on the floor play a role, works in normal circumstances, BlackRock said, "it may have inadvertently contributed to delayed opens and heightened market uncertainty" on Aug. 24.

Among other concerns are the widespread use of stop orders by retail investors, which many on Wall Street believe contributed to the volatility.

Two people familiar with the matter said there have been discussions with brokers that offer stop orders about educating their clients on how to use them.

While stop orders sound like they can protect an investor, they actually send an instruction to an exchange to execute a trade immediately at any price, commonly known as a market order.

In volatile markets, that can mean orders to sell securities as prices are plunging.

Data from NYSE show that it had nine times the number of market orders on Aug. 24 compared with an average day. Market orders as a percent of executed volume were four times higher than usual.

"Excessive use of market and stop-loss orders that seek 'liquidity at any price' inflamed the situation," said the BlackRock paper, which recommended investors use limit orders instead.

Exchange action

Exchanges are likely to be receptive to today's proposals given BlackRock's position as an asset manager, said Rich Repetto, an analyst at Sandler O'Neill & Partners LP.

"Normally the exchanges listen very much to what the buy side has to say," he said in a phone interview. "Generally they're not viewed as competitors so they're open to working together to come up with the best solutions."

Some have already been taking steps. Stacey Cunningham, chief operating officer at NYSE Group Inc., a unit of Intercontinental Exchange Inc., said last month that it has hired a consultant to review how ETFs trade on the company's markets, including looking at trading halts.

The effort will also try to assess whether brokers need better incentives to keep trading when markets turn choppy, she said. NYSE Arca on Sept. 4 filed with its regulator to widen the price bands it uses at the market open.

Nasdaq Inc. declared its backing for BlackRock's effort after the paper's publication.

"We are supportive of many of the recommendations made in the report," Joseph Christinat, a spokesman, said by phone. "Nasdaq opens every security, every day at 9:30am New York time, so we are also absolutely steadfast about ensuring the timeliness and transparency of the U.S. equity markets, for the benefit of all investors.‎"

Randy Williams, a spokesman at Bats Global Markets Inc., declined to comment on the BlackRock proposals. Sara Rich of NYSE Group Inc. didn't respond to requests for comment.

"This really is a market structure issue for ETPs," said James Angel, associate professor of finance at Georgetown University, in a phone interview. "Unless the industry fixes these things quickly, it will happen again."