NYSE Proposes Trading Halts in Volatile Stocks : Would Ban Activity for Short Time if an Issue Swings by Certain Percentage

The New York Stock Exchange, exploring ways to quell volatility following the October market crash, is considering an informal proposal to impose temporary trading halts on individual stocks if their prices move up or down a certain percentage, NYSE officials said Thursday.

The idea, which will be discussed at the exchange’s next board meeting Feb. 4, could become the second major change in its trading practices since the October debacle. Last week, the exchange initiated a six-day test of a plan to ask traders to temporarily stop using its main automated system for program trading--the computerized, rapid-fire investment strategy widely blamed for contributing to recent volatility--if the Dow Jones industrial index moved 75 points in either direction in a given session.

That test, which would have expired today, was extended to Feb. 5, the NYSE announced Thursday.

The trading halt proposal also comes to light less than two weeks after the so-called Brady Commission--which studied the causes of the crash--called for greater coordination between exchanges of “circuit breakers” such as trading halts and price limits.

However, some securities industry officials immediately criticized the new NYSE proposal, saying it doesn’t go far enough in addressing market instability or that it undermines the spirit of the Brady Commission recommendations. Others said the idea, as currently formulated, would not be significant since it would seldom be imposed and would likely be circumvented.

Some said the NYSE is considering the idea in part to head off regulations that might be imposed by the Securities and Exchange Commission or by Congress--rules that the securities industry might find even less palatable.

Under the informal proposal, the Big Board would halt trading for a period, such as 10 or 15 minutes, if a stock moved a certain percentage in a given session. Such a percentage has not been formally proposed, but NYSE Chairman John J. Phelan Jr. has suggested 30% as a “ballpark” figure, NYSE spokeswoman Sharon Gamsin said. Price movements could exceed the percentage trigger once trading resumed.

Such a trading halt presumably would give investors a chance to assess the news affecting a stock and adjust their trading strategies, with the aim that trading could resume in a more orderly condition. Such halts give specialists--floor traders that make markets in individual stocks--time to bring buy and sell orders into balance.

However, no formal proposal specifying an exact percentage or trading halt duration will be made at the Feb. 4 board meeting, Gamsin said. Instead, she said, the NYSE board will discuss the general concept.

Actual implementation of any plan would be “quite a ways down the road,” Gamsin said. If accepted, the plan would be tried on a test basis on a few stocks, she said.

If adopted, the NYSE would become the latest of several exchanges to implement new trading halt rules following the crash.

The Chicago Board of Trade recently established a permanent rule to impose trading halts if certain stock index futures rise or fall by a specified large amount in any given session. Triggers for these trading halts are set so high, however, that analysts say they will rarely come into play.

Other futures exchanges are considering making their temporary rules on trading halts permanent as well. Selling of stock index futures contracts are widely blamed for helping spur massive unloading of stocks on Oct. 19 and the days preceding it.

The NYSE currently imposes trading halts when buy and sell orders for individual issues go into sharp imbalances or before companies make major announcements that are likely to produce sharp price changes in their stock.

However, in recent years, the NYSE has been imposing trading halts less frequently--and for shorter time periods--in part because of competition from other exchanges and so-called third market brokerage firms, which continue to trade stocks that are halted on the Big Board.

Some industry officials lauded the proposal in concept but wondered whether it would work in reality.

“I agree with the objective. To the extent it will ameliorate wild fluctuations, it’s healthy,” said Maurice Mann, chairman of the Pacific Stock Exchange. However, Mann asked: “By restricting market forces, are we helping the market or preventing it from performing its natural function?”

He also warned that the proposal, coming shortly after the NYSE’s test on limiting program trading, might represent a dangerous “piecing and patching” approach to correcting the ills of the market.

Some critics of the new proposal said Thursday that trading halts undermine the free market and could cause even more panic as investors rush to place their orders before halts begin. Some also said limits are ineffective anyway because traders seek other exchanges or the third market firms.

“The professional investor should be able to trade anytime,” said Frank E. Baxter, chief executive of Jefferies & Co., a Los Angeles brokerage that specializes in third market trading.

Other critics said a 30% trigger and 10- to 15-minute period for trading halts would make them fairly inconsequential.

“I don’t think it’s really a big deal,” said Robert N. Gordon, president of Twenty-First Securities, a New York trading house specializing in futures and stock arbitrage. With a 30% trigger, trading halts would “come into play very little, and when they do, what is 10 minutes going to do?”

Rather than proposing its own trading halt rule in isolation, the NYSE should seek to coordinate trading halts and other moves with the Chicago futures exchanges, Gordon said. Such halts may require temporarily suspending trading on the entire NYSE, he said.

However, some industry officials said the NYSE proposal could spur coordination with other markets.

“This is a constructive step, but what still has to be examined is what will work across markets,” said Howard M. Stein, chairman of the Dreyfus Corp. mutual fund firm and a member of the Brady Commission. “It’s possible that moves by each market initially are a step in the direction of them saying, ‘Let’s harmonize this.’ ”