Exploring NYSE's Controversial Rule 48
Rule 48 was an NYSE regulation to maintain market order during times of high volatility, but it faced criticism for allowing trading without a posted opening price. Its controversial implementation during the 2015 market crash led to its abolition in July 2016, and NYSE revised other regulations to address similar situations, aiming to foster greater transparency and confidence in the markets.
Basics
Rule 48 was introduced by the New York Stock Exchange (NYSE) in 2007 as a means to maintain market order during times of high volatility, especially to prevent panic-selling at the opening bell. However, in August 2015, the rule worsened significant price swings, prompting the NYSE to eliminate it in July 2016. Instead, the NYSE revised other regulations to address similar situations.
Rule 48 and Stock Market Trading
Rule 48 was a procedure implemented by the New York Stock Exchange (NYSE) to expedite the opening of stock market trading. It allowed for the suspension of the daily requirement related to individual stock prices each morning and waived the need to obtain approval from stock market floor managers for certain stocks.
Rule 48 vs. Circuit Breakers
Unlike circuit breakers, which halt trading during market hours in response to extreme volatility, Rule 48 was invoked before the market's opening. Exchange leaders made this decision based on specific conditions, including high volatility in the previous trading session (even when circuit breakers were triggered), significant volatility in foreign markets, substantial selling in the futures market before the opening bell, and government announcements or major geopolitical events abroad.
The End of Rule 48
The rule provided a way to establish order in the markets during periods of potential panic trading, particularly when it was clear that a particular stock would open much higher or lower than its previous day's closing price. However, after Rule 48 exacerbated significant price swings during a hectic period in August 2015, the NYSE decided to abolish it in July 2016. Instead, the exchange revised other regulations to address similar contingencies.
A History of Rule 48
Rule 48 was officially approved by the Securities and Exchange Commission (SEC) on December 6, 2007, in response to concerns about a global recession. The rule was put into effect on January 22, 2008. Over the years, it was amended multiple times and invoked at least 77 times from September 2008 to September 2015 for various reasons, such as the European debt crisis in May 2010 and a New York blizzard in January 2015.
Criticism of Rule 48
Despite its implementation, Rule 48 faced criticism for allowing trading without a posted opening price. This lack of transparency could lead to investors unknowingly selling stocks at very low prices, potentially causing significant losses if prices dropped below the previous day's close.
Notable Incident
A notable incident occurred on August 24, 2015, when Rule 48 was invoked due to concerns about the NYSE market's exposure to the Chinese stock markets' volatility. The Shanghai Composite Index had fallen 7.6%, and the Shenzhen Composite slipped 7.2% the previous day. The invocation resulted in disorderly trading, negatively impacting several stocks and causing a record intraday drop in the Dow Jones Industrial Average.
Apple Inc. Impact During Rule 48 Invocation
Apple Inc. was one of the companies affected, experiencing a significant drop in the opening hour, with shares reaching a low of $92. Buyers had the opportunity to purchase shares at this very low level, but Apple later rebounded, closing the day at $108. Those who sold their shares at market value when the price collapsed to $92 likely missed out on selling at a higher level. Using a limit order or avoiding Rule 48 might have provided a better outcome for such sellers.
NYSE's Proposal to Replace Rule 48
After the chaotic events of August 24 and the subsequent two days, NYSE officials started reconsidering Rule 48. On March 31, 2016, they submitted a request to the SEC to eliminate the rule. In their request, they acknowledged that the absence of pre-opening indications during the extreme market volatility conditions of August 24, 25, and 26, 2015, left a void in the information available to market participants for assessing security prices at the opening bell.
Instead, the NYSE proposed modifications to Rule 15, which would require market makers to publish pre-opening indications if prices changed by 5% or more, and Rule 123D, allowing securities to open electronically unless there was a price change of 4% or more.
Abolition of Rule 48
The SEC made a significant decision in July 2016 to abolish Rule 48, responding to the concerns raised by its controversial implementation. The removal of the rule brought an end to uncertainties associated with trading without a posted opening price during times of extreme volatility and aimed to foster greater transparency and confidence in the markets.
Conclusion
Rule 48 was introduced by NYSE to maintain market order during high volatility but faced criticism for allowing trading without a posted opening price. Its controversial implementation during the 2015 market crash led to its abolition in July 2016, and NYSE revised other regulations to address similar situations, aiming to foster greater transparency and confidence in the markets.