Exclusive: U.S. stock options markets agree to need for trading halts on big moves

Thu Oct 23, 2014 10:38am EDT
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By John McCrank

NEW YORK (Reuters) - U.S. options market operators have agreed in recent months on the need for new automatic trading halts when stock options prices suddenly surge or plunge, in a bid to reduce excess volatility and blunt the impact of erroneous trades, according to five sources with knowledge of their discussions.

The plan, which takes its cue from a rule known as "Limit Up/Limit Down" that U.S. stock markets put in place in response to the May 6, 2010 "Flash Crash," is still in the early stages, with market operators trying to figure out how a similar rule could be applied to options trading, the sources said. 

    In the stock market, if the price of a stock moves outside of a range of prices it has recently traded in for more than 15 seconds, the stock is briefly halted to give traders a chance to figure out if the move was justified, or if it might have been in error.

There are currently 12 options markets in the United States, run by Nasdaq OMX Group (NDAQ.O: Quote), BATS Global Markets, Deutsche Boerse's (DB1Gn.DE: Quote) ISE unit, TMX Group’s BOX Options Exchange, Miami International Holdings Inc, Intercontinental Exchange Inc's (ICE.N: Quote) NYSE unit, and CBOE Holdings Inc (CBOE.O: Quote).

"This initiative makes great sense for the industry to pursue and we're happy to work with market participants and regulators to make it a reality," said Jeromee Johnson, who runs BATS' options market.

Boris Ilyevsky, managing director of ISE’s options exchanges, said that ISE supports the concept of a theoretical price band for options, noting that it would be an added risk protection mechanism for the market. He said the exchange is in discussion with regulators and other exchanges, adding that "much work remains to be done to create a structure that provides sufficient protection but also allows sufficient flexibility in volatile market conditions."

The other market operators declined to comment.

The options market plan is likely years away from being implemented. But the move by market operators highlights growing concerns over the speed and complexity of options markets, which are dominated by computerized trading, after a series of operational snafus in the markets in recent years. These include a software error by Goldman Sachs Group Inc (GS.N: Quote) in August 2013 that flooded stock options markets with bad trades, sending some options prices down sharply.   Continued...

Traders work on the floor of the New York Stock Exchange October 20, 2014.  REUTERS/Brendan McDermid