In October, a number of American securities exchanges, including the NASDAQ Stock Market and the New York Stock Exchange, adopted uniform rules for the resolution of trades deemed “clearly erroneous.” The exchanges used their self-regulatory powers to develop a numeric formula whereby a party mistakenly trading a security at more than a set deviation from its then-current price may request that the exchange void the trade. The rule change creates consistent standards for breaking trades across equity markets and limits the discretion that individual exchanges previously held. On October 21, 2009, the Financial Industry Regulatory Authority, Inc. (FINRA) proposed to change its rules governing clearly erroneous executions, including those covering over-the-counter equity securities.
Effect of Proposed Rules
The proposed rules to standardize clearly erroneous trading standards across exchanges are intended to benefit traders who buy and sell securities on multiple platforms. The standards for timely submission and review are designed to prevent erroneous trades from “cascading” from one market to the next during periods of heightened volatility, as the review and breaking of erroneous trades will dampen unnecessary price fluctuation. SEC Chairman Mary L. Schapiro has touted the rule as “reducing the potential for market confusion, especially during periods of high market volatility” by breaking erroneous trades and preventing waves of erroneous trades from creating sweeping price changes across interconnected and increasingly automated modern markets.