The rule is designed to make it easier and faster for markets to open stocks on volatile trading sessions. However on August 24 last year Rule 48 was implicated in an ETF debacle.
The controversial rule allows market makers on the trading floor to do away with time-consuming opening processes on particularly volatile days. Most of the time traders are expected to reveal which securities are predicted to open with big gains or losses, but when the entire market is volatile they can become overwhelmed.
On August 24 last year Wall Street opened in chaotic fashion due to concerns over a Chinese slowdown and big losses on Asian exchanges. On that fateful day a number of stocks inexplicably lost huge amounts of value, and lots of popular U.S.-stock exchange-traded funds suffered as their prices became massively disconnected from the value of their assets.
Rule 48 was criticized by market participants who said that it added to the confusion. At the time many thought that Rule 48 was at least partly to blame for the confusion of that morning, and now a report from the Securities and Exchange Commission provides further evidence for that theory.
Deutsche Bank disagrees that ETFs are an issue. In a recent report the investment Bank opines:
we saw some big industry personalities questioning the real impact of ETFs and suggesting that they posed a systemic risk, particularly in the Corporate High Yield market; another episode targeted ETFs and their role in the August 24th sell-off. In the first case, this thesis was tested during the High Yield sell-off last December when ETFs provided massive liquidity to the markets (over $4bn on one day) without any signs of major dislocation, actually providing relief to the asset class during a moment of stress. In the second case, most of the reasons behind the events that took place on August 24th were related to market volatility, market structure issues, or an inadequate usage of market orders; none of which was specifically an ETF-induced problem.
NYSE set to end Rule 48 under new opening procedures
The SEC report found that only 38% of NYSE-listed S&P 500 symbols were trading by 9:35 a.m. that morning, whereas they were trading on other exchanges from 9:30 a.m. as usual. Now it appears that the NYSE will shelve Rule 48.
Nicole Bullock at Financial Times wrote that Stacey Cunningham, chief operating officer at the NYSE, called Rule 48 “no longer relevant in the opening procedures we have proposed” during Tuesday’s Equity Market Structure Advisory Committee, convened by the SEC. Bullock goes on to report that the NYSE is set to ask permission to completely
Among other changes the NYSE intends to petition regulators to change existing rules, enabling market makers to provide more information to market participants on volatile days. The changes were recommended as the result of a study completed by McKinsey.
H/T Chris Dieterich, Barron’s