While coronavirus has caused unprecedented volatility, the markets have stabilized some.
Tom Bira is FINRA’s Executive Vice President of Market Regulation and Transparency Services and he was the latest guest on FINRA’s podcast, Unscripted.
On the podcast he noted that four of the five times in which circuit breakers were implemented on the NYSE occurred in March.
“Well it’s pretty unprecedented. There is something called circuit breakers, which have existed in the marketplace since after the market break of 1987, technically implemented in 1988. And so they’ve been in effect for 32 years,” Bira said. “And prior to this March, the circuit breakers had been activated once in October of 1997. Why this is pretty extraordinary is that between March 9th and March 18th–that’s eight business days–we actually hit the circuit breakers four times, just to give you a sense of the perspective there.”
The circuit breakers on the NYSE are implemented after the 1987 crash and they shut off trading for a cooling off period when the S&P 500 loses too much intraday.
“The circuit breakers are based off of the broad market move of a broad index like the S&P 500. But I think with the Flash Crash also showed as you can also have sort of the mini crashes on a stock by stock basis.” Bira said. “And so the Limit Up/Limit Down structure was put in place. The best analogy I can think of to explain it is, I don’t know if you’ve ever done this when you go bowling and you can put up the bumpers, so the ball won’t go into the gutter? That’s kind of like Limit Up/Limit Down and the stock market is the bowling ball.”
As Bira noted, it was only implemented once, in 1997, before being activated four times due to coronavirus volatility.
The VIX, which measures volatility, also hit unprecedented levels in March, Bira noted further, “Likewise the CBOE VIX index, which is also sometimes commonly referred to as the fear index, hit a record high of 83 on March 16.”
That was in March.
Bira noted that the VIX has settled down since then, “It has receded since then and come back down, but again those two things I think in and of itself sort of give you a sense for how volatile it’s been.”
The VIX closed at 37.19, meaning far less volatility, on Friday May 1, 2020.
Meanwhile, the S&P 500 and DJIA both also saw strong gains in the month of April.
The DJIA closed at 25,409.36 on February 28, 2020. It continued trending down in March until it hit a low that month of 18,591.93 on March 23, 2020.
Since, the DJIA has been trending up finishing at 21,917.16 on March 31, 2020. It finished at 24, 354.72 on April 30, 2020.
Bira noted that markets have shown a remarkable resiliency and he credits some of the regulations implemented.
“I’ve been very pleased with how the markets have done. I think the SEC gets a lot of credit. There was a regulation that they put in place a couple of years ago called Reg SCI, Regulation Systems Compliance and Integrity, and it requires entities like the exchanges and FINRA, for our critical systems, to make sure that they have capacity to withstand the volume surges or persistent volume surges, backup facilities, fail tests–all those things that you need to do to have sound technology. I think we’re seeing the benefits of that.
“We really haven’t seen significant outages–I’m actually not aware of any, or has had an impact on the market, but also I think what I’ve been really pleased about is the infrastructure and the integrity of the technology is there, but also the compliance, and what I mean by that as you want markets to have good information flowing through them, because you want to be able to price the assets as best you can. And you want to have information that makes for a good audit trail, because we’ve got a monitor all of this. And so, there are things like trade reporting that have held up very well. We’re seeing that there’s 0.01 percent late trades coming into the systems, and that’s terrific.
“There’s another regulation called Regulation National Market System Reg NMS, and there’s a Lock/Cross rule and a trade-through rule that are part of Reg NMS. We’re seeing for trade-throughs there is a 99.9 percent compliance rate, for Lock/Cross we’re seeing 98 percent compliance rate. OATS, which is a hyper technical rule that requires firms to capture things down to the millisecond in terms of how an order makes its way through the system. And we’re seeing compliance rates with OATS hanging at 99.9 percent.
“Typically, in prior periods of extreme volatility, which might just be a day or two, you would see a degradation and the integrity of the data. And so, the fact that we’ve got more of a persistent time of extreme volatility, one I don’t think we’ve ever experienced before, to have those compliance rates stay at those levels is impressive and I think the firms deserve a lot of credit. We have our job to do to make sure that people comply with those types of rules, but it shows that there are very sound systems in place at the firm level too. And that’s terrific.”
FINRA is the Financial Industry Regulatory Authority and it is a self-regulatory organization formed in 2007 when the regulatory arms of the NYSE and the NASD merged.