Nov. 27, 2023
Comment on the “ Joint Industry Plan; Notice of Filing of the Twenty-Third Amendment to the National Market System Plan To Address Extraordinary Market Volatility by Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., Investors Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, MIAX Pearl, LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc. ”
Subject: Opposition to the NYSE’s Limit Up-Limit Down (LULD) Rule Proposal
To Whom It May Concern at the Securities and Exchange Commission,
I am writing to express my strong opposition to the recently proposed amendment to the National Market System Plan by the NYSE Group, Inc., and other participating exchanges and FINRA, as outlined in the Federal Register Document Number 2023-25543. This proposal, which intends to modify the Limit Up-Limit Down (LULD) mechanism and adjust the acceptable price bands for stocks, in my view, poses a significant threat to the foundational principles of a free and open market.
1. Infringement on Free Market Principles: The cornerstone of a free market economy is the unrestricted flow of supply and demand, determining the price of securities. The proposed tighter price bands effectively act as a regulatory straitjacket, limiting the natural price discovery process that is vital for a healthy market. While protecting investors from extreme volatility is a noble goal, over-regulation of price movements can lead to a manipulated and less transparent market environment.
2. Adverse Impact on Price Discovery: The LULD rule, particularly with its revised, narrower bands, risks creating an artificial ceiling and floor for stock prices. By restricting how much a stock’s price can move within a short period, the rule could stifle the market’s ability to react and adjust to real-time information, news, and investor sentiment. This could potentially mask underlying market conditions, leading to a delayed but abrupt adjustment when the bands are eventually breached.
3. Potential for Increased Volatility Post-Halt: Paradoxically, these tighter controls may lead to increased volatility. As trades accumulate at the band limits, the resumption of trading could trigger sudden and sharp price movements, contrary to the proposal’s intent to reduce volatility.
4. Concerns Over Potential Market Manipulation: An additional area of concern with the proposed changes to the LULD rule involves the intersection with leveraged derivatives. Leveraged derivatives, such as options and futures, allow significant positions to be taken with relatively less capital. In the hands of large market participants, these instruments could potentially be used in conjunction with the predictable price range boundaries set by the LULD rule to manipulate market conditions. For instance, anticipating the trading halts and subsequent market reactions could enable these participants to position their derivative strategies to exploit these movements. This scenario could lead to artificial price pressures, benefitting certain positions at the expense of the broader market’s integrity. While regulatory bodies monitor for market manipulation, the sophistication of such strategies and the complexity of financial instruments pose significant challenges in identifying and proving manipulative activities. This potential risk highlights the need for a thorough evaluation of the rule’s implications on market dynamics and fairness.
5. Undemocratic Market Influence: The proposal seemingly caters to the interests of larger, institutional investors, often referred to as ‘Smart Money’, who may benefit from reduced volatility and more predictable price movements. This can be at the expense of smaller, retail investors, essentially eroding the democratic nature of the public markets where every participant should have an equal opportunity based on market forces.
In light of the aforementioned concerns, particularly the potential for market manipulation and the undermining of free market principles, I urge the Commission to decisively reject the proposed modifications to the LULD rule. The introduction of such regulations, which could facilitate market manipulation and disrupt the natural mechanisms of price discovery, is not just a deviation from the ethos of a free market, but also a step towards a more constrained and potentially manipulated trading environment. The essence of our financial markets lies in their ability to freely reflect the collective sentiments and decisions of all investors, both big and small. Any regulation that risks compromising this foundational principle must be viewed with the utmost scrutiny and, in this case, firmly opposed. The preservation of market integrity and the protection of investor interests demand nothing less than our collective vigilance against such potentially detrimental changes.
Thank you for considering my perspective on this critical issue.
Sincerely,
Alexander Kuchta