NYSE Prepares For Volatility By Invoking Rule 48

NYSE Prepares For Volatility By Invoking Rule 48
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The New York Stock Exchange invoked Rule 48 this morning for the market’s open, demonstrating just how serious the problems in China are. China’s stock market crash has been spilling over into other markets around the world, although investors apparently don’t know what to think.

The stocks of Wall Street darlings traded on both the NYSE and the NASDAQ have been extremely volatile over the last couple of weeks as investors debate just how serious of an impact China’s problems will have on U.S.-based companies.

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What is Rule 48?

Rule 48 is designed to try to smooth out the markets before their opening to battle high levels of volatility. The rule is aimed at keeping trades in order as the financial market takes a rough ride. Rule 48 is only used if the markets are so volatile that the volatility will probably impact the exchange’s entire trading floor, according to CNBC.

Designated market makers are restricted in releasing price indications before opening bell when the NYSE invokes the rule. In the past, the stock exchange has used the rule very sparingly, although the stock exchange invoked it on three consecutive trading days last week and again this morning before opening bell. Since 2008, it has only been invoked 77 times. The Securities and Exchange Commission approved Rule 48 in December 2007.

How does the NYSE decide whether to invoke Rule 48?

Rule 48 differs from the circuit breakers that halt trading on a particular stock because it actually accelerates the market’s opening by lifting the requirement that stock prices be announced when the market open. On normal trading days, managers on the trading floor of the stock market must approve the prices before trading can begin. Because they do not have to approve the prices under Rule 48, trading on stocks can start sooner.

In deciding whether it is necessary to invoke the rule on a particular day, the NYSE looks at volatility during the last trading day, what happened in foreign stock markets before its opening, futures market activity, government announcements, and the volume of preopening interest indications.

Dow plunges in early trades

A look at major indices makes it clear why the NYSE invoked Rule 48. U.S. stocks declined approximately 2% in early trading today following weak data from China. The Dow Jones Industrial Average tumbled by more than 400 points, landing firmly in correction territory, before recovering slightly.

The NASDAQ Composite Index fell so low that it eliminated all the gains it made this year. According to CNBC, it was struggling to stay out of correction territory this morning. The S&P 500 Index declined 2%, landing within half a percent of a correction.

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