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NYSE busts trades as Anadarko stock falls temporarily to a penny

BY CHRIS DIETERICH 

NEW YORK -- A sharp drop that drove Anadarko Petroleum' s to a penny in the last second of trading Friday exposed a vulnerability in trading rules adopted last month to curb sharp stock swings.

Andarko' s stock fell from over $90 a share to as low as one penny in fraction of a second and then recovered, closing up $2.22, or 2.5%, to $90.03, according to FactSet. NYSE Euronext canceled all trades executed below $87.56 that took place between 3:59 p.m. EDT and 4:00 p.m., according to an alert sent to traders at 4:42 p.m.

Last month, exchanges launched a framework to curb sharp stock swings. The so-called limit-up/limit-down system does away with single-stock circuit breakers set up by the Securities and Exchange Commission in the wake of the "flash crash" on May 6, 2010, when the Dow Jones Industrial Average fell nearly 1,000 points in a few minutes.

Limit-up/limit-down is designed to prohibit wild price swings by allowing defining valid trades only in within certain price bands. For Anadarko and other large stocks, the range is 5% above or below the stock' s five-minute moving average.

But the rules didn' t take hold Friday because the one-year pilot program is rolling out in phases, and doesn' t apply to stock moves that take place in the final 30 minutes until Aug. 1, according to the SEC.

"One of the gaps in limit-up/limit-down is that it does not apply in the last 30 minutes," said James Angel, a professor of finance at Georgetown University. "We have so many contracts tied to closing prices that you' ve got to get it right: mutual fund pricing is based on the close, as is the value of your account."

The new limit-up/limit-down rules did away with NYSE' s own program to curb swings on its own exchange. So-called "liquidity replenishment points" were removed by NYSE at the request of the SEC. NYSE criticized the SEC for ending the program, saying that they benefited investors.

"We believe this occurrence is an unintended consequence of the new limit-up/limit down rules and the absence of our LRPs," according to a NYSE spokesman.

Dow Jones Newswires

05/17/2013

 

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