Even after today’s pull-back, the US stock market is just one day removed from the all-time high. The VIX is still below the 20^th percentile of historical volatility readings. Low volatility, new highs… you would think everything is hunky dory, that fear of another massive 20% drop would be the furthest thing from people’s minds. Well, someone rather important is thinking about it – namely the SEC, CME, and NYSE.

The CME announced yesterday its new “Market-Wide Circuit Breakers” to align with the stock exchanges, where the new trading pauses are between 65% and 70% of what they used to be:

	Current Levels	Levels as of April 8, 2013	Result
Level 1	10%	7%	If a Level 1 or Level 2 market‐wide circuit breaker level is touched prior to 2:25 p.m. CT, a 15‐minute market‐wide trading halt will be triggered.
Level 2	20%	13%
Level 3	30%	20%	If a Level 3 circuit breaker is touched at any time, trading is halted for the remainder of the day.

 

Now this is all well and interesting; and the CME for one is none too happy about a decline of just 20% shutting their money making machine down until the next morning (they lobbied for reinstating trading in the Globex session after the normal session close). But what we found more interesting is that the concept of “Limit Up” and “Limit Down” is also coming to stocks.

Via Bloomberg:

Two initiatives for curtailing volatility will be implemented April 8 for one-year pilots: a program known as limit-up/limit-down for individual shares and a refurbished system for halting all exchange-listed equity trading in U.S. securities and futures markets during periods of extreme volatility.

…Under the limit-up/limit-down system, trades won’t be allowed to take place more than a specified percentage above or below a stock’s recent average price. If no trades occur within the band for more than 15 seconds, a five-minute halt will ensue, according to the SEC.

Limit moves have long been the purview of the futures markets, not stocks. We’ve talked about limit moves here before, and it will certainly be interesting to see stock investors adapt to it, even if it will be somewhat different in operation.  Although this is just a 1 year trial, and at the current pace these limit moves won’t even get tested by a big down day. Some HFT algos will probably take a shot at it, though, just to see if they can break it.

Anyway – we’re left wondering what to believe… the “all’s clear” readings we’re currently seeing in the VIX, or the volatility is coming message implied by exchanges tightening the circuit breakers so a repeat of past market routes are less severe (in the short term). Don’t forget that attempts to dampen volatility, or create taller heads, comes by definition with the counterweight to that, fatter tails.