U.S. regulators and stock exchanges are re-examining rules designed to ensure orderly trading in equities after investors fell afoul of them during a near-unprecedented bout of volatility at the beginning of last week, exchange officials said.
The measures, which include pausing trade in individual stocks if their prices move violently in a short time, were introduced after the 2010 flash crash when around $1 trillion in paper value was temporarily wiped from U.S. stock markets within minutes.
But some investors have said that the rules failed their first big test on Aug. 24, when panic over the health of the Chinese economy triggered a record intraday drop in the Dow Jones Industrial Average.
During the mayhem, more than 1,250 trading halts were triggered in 455 stocks and exchange-traded funds (ETFs), which are used by ordinary investors to gain exposure to a basket of securities or an entire index.
The sporadic and rapid-fire halts led to confusion among some investors as to what was trading and questions whether they got prices worse than they should have.
"We had some really errant prints out there that stood that shouldn't have stood," said Reggie Browne, senior managing director at Cantor Fitzgerald, who is known as the godfather of ETFs.
The U.S. Securities and Exchange Commission is now poring through the trading data from Aug. 24 to get a better idea of what might be done to dampen the volatility in ETFs, many of which saw their prices diverge widely from the stocks they were tracking, said a person familiar with the regulator's thinking.
The SEC has been looking to adjust the rules for some time, but the recent events have added a sense of urgency, said the person, who did not have permission to be quoted in the media.
While the rules prevented the massive canceled trades that followed the flash crash, the widespread halts may have slowed down the markets' recovery, prompting calls for SEC and the exchanges to redesign them.
"It exposed the sledgehammer nature of the tools they gave markets," said Dave Nadig, director of ETF research at FactSet.