CME Slams Limit Up/Limit Down Plan

As reported by Traders Magazine’s Peter Chapman, CME Group says a proposed limit up/limit down plan for stocks and exchange-traded products is bad market structure.

The operator of four futures exchanges told the Securities and Exchange Commission in a letter last month that a plan to prevent price spikes in individual securities would do more harm than good. The CME wants the regulator to nix the proposal by the Financial Industry Regulatory Authority and the nation’s stock exchanges and consider a plan of its own.

The self-regulatory organizations’ proposal “sets forth an overly complicated and insufficiently coordinated structure,” CME chief executive Craig Donohue told the SEC. “In a macro-liquidity event, [it] will have the unintended consequence of undermining rather than promoting liquidity.”

The SROs’ proposal is a refinement of the existing single-stock circuit breaker mechanism put in place after last year’s “flash crash” during which several stocks dropped precipitously and then rebounded. The idea is to dynamically apply price bands around stocks and exchange-traded products and limit trading to within those bands for 15 seconds. If the liquidity condition does not improve, then trading is halted for five minutes.

CME, which trades futures on equity indexes as well as options on those futures, maintains the plan could halt trading in index-based ETFs without regard to futures and options traded on those indexes. The plan also does not coordinate a halt in trading of an ETF with the market-wide circuit breakers based on the Dow Jones Industrial Average.

In addition, CME charged, the limit up/limit down proposal could halt trading in the individual components of those indexes, which could make it difficult to calculate index values, thereby disrupting trading in futures markets.

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