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Market Structure & COVID-19: Handling Increased Volatility and Volumes

April 28, 2020

Market volatility in recent weeks has surpassed anything else in history in terms of both the extremity and duration. Despite that, the so-called plumbing of U.S. financial markets has held up remarkably well—even with most market participants working from home.

On this episode, we talk to FINRA’s Executive Vice President of Market Regulation and Transparency Services Tom Gira, who walks us through the evolution of our market structure that has contributed to this resilience and how FINRA and others are handling the increased volumes.

Resources mentioned in this episode:

COVID-19 Resource Page


Episode 13: How the Cloud and Machine Learning Have Transformed FINRA Market Surveillance

Listen and subscribe to our podcast on Apple PodcastsGoogle Play, Spotify or where ever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 


00:13 - 00:29

Kaitlyn Kiernan: Market volatility in recent weeks has surpassed anything else in history in terms of both the extremity and the duration. Despite that, the so-called plumbing of U.S. financial markets has held up remarkably well--even with most market participants working from home. On this episode, FINRA's Executive Vice President of Market Regulation Tom Gira joins us to walk us through the evolution of our market structure that has contributed to this resilience and how FINRA and others are handling the increased volumes.

00:30 - 00:46

Intro Music

00:47 - 01:15

Kaitlyn Kiernan: Welcome to FINRA Unscripted, from Hoboken, New Jersey. I'm your host Kaitlyn Kiernan. We continue to record remotely due to the ongoing COVID-19 pandemic, but thanks to Zoom we're welcoming back to the show from Potomac, Maryland, FINRA's Executive Vice President of Market Regulation Tom Gira. Tom thanks for joining us. So Tom during this period of extraordinary volatility the plumbing of the markets has held up pretty well. How unprecedented is the current environment?

01:15 - 01:53

Tom Gira: Well it's pretty unprecedented. There is something called circuit breakers, which have existed in the marketplace since after the market break of 1987, technically implemented in 1988. And so they've been in effect for 32 years. And prior to this March, the circuit breakers had been activated once in October of 1997. Why this is pretty extraordinary is that between March 9th and March 18th--that's eight business days--we actually hit the circuit breakers four times, just to give you a sense of the perspective there.

Likewise the CBOE VIX index, which is also sometimes commonly referred to as the fear index, hit a record high of 83 on March 16. It has receded since then and come back down, but again those two things I think in and of itself sort of give you a sense for how volatile it's been. And the circuit breakers that I mentioned before, I think what's also notable about what we've been experiencing recently is how many times have come very close to activating them. So even though we only activated them four times, there were many days where they were coming right up to that limit.

02:28 - 02:40

Kaitlyn Kiernan: That is pretty remarkable to have four events in such a short amount of time when there's only been five events in history. What happened in 1997 to trigger that circuit breaker?

02:40 - 03:14

Tom Gira: Well that's a good question. I'll try to give a short answer because it could be a long answer. At the time there were some issues with how the Asian markets were doing and how the currency markets were doing. But it wasn't like obviously that environment that we have today. And so, there was actually a fair amount of debate after the circuit breakers were activated on that day. They actually were activated twice. With the circuit breakers there are different levels. And so, at the time if the Dow Jones moved--I think it was 250 points--it shut down for half an hour. If it moved 400 points it shut down for the rest of the day.

That's actually the only day that there've been two levels hit, back in 1997. But it's important to keep in mind what the level of the market was. When the circuit breakers were first implemented back in 1988, to hit that first level the market had to move 12 percent, and I think the Dow was like 2,100 points back in 1988. In 1997, the Dow had experienced a very good run of the market. The Dow was roughly about 8,000, and the circuit breakers were based off an absolute point structure not a percentage structure.

So that first level that was activated in '97, it only took a 4.7% move in the market. And the second level only took a 7 percent move in the market. So there was a lot of debate saying we needed to modernize the circuit breakers, because frankly given the economics of the market at that time, a lot of people thought it didn't really warrant the markets shutting down that it could have been, not a normal day--a pretty volatile day, but nothing that should have prompted the market to close. And so, after that the bands were then sort of widened and became done on a percentage basis not a point basis.

04:22 - 00:04

Kaitlyn Kiernan: That makes sense. A 250 move today would be about a 1% move, so it makes sense that you don't want to get to a point basis. And is it still tied to the Dow, or has that changed as well?

04:35 - 05:14

Tom Gira: Now that's where it gets you into the Flash Crash, and 9/11 is another event where people ask about circuit breakers sometimes, but what happened that day is the markets actually never opened. But the Flash Crash was another day where there was a precipitous drop in the afternoon. It was a 9 percent drop in the market, but after '97 it was set at a 10 percent level. So it didn't activate the circuit breaker because of how they were changed. However, there were some changes with respect to the circuit breakers.

Sorry if I get too technical, but with the Dow Jones as a price weighted index while the S&P Indices and most other indices are capitalization weighted indices. And so those are probably more accurate if you're going to be basing the market movement, you'd want to be doing it off of capitalization weighted index. So it shifted and is no longer activated by the Dow, it's activated by the S&P 500 index. And then the exchanges and FINRA kind of came up with a different activation structure where there'd be a level one limit would be at a 7 percent decline in the market, level 2 would be 13 percent and Level 3 would be a 20 percent decline in the market with the provision that once you've got after 3:25 p.m. in the day you wouldn't shut down if you had a level one or level two. Then they also move the duration to 15 minutes. That was what happened after the Flash Crash.

What I would say recently is that recently what we’ve experienced on some of the days there's so much pent up negative news in how the futures were going pre-opening, it went down so quickly it activated from the first minute trading. Do we now sort of need to factor that in? Do you want to open it up for such a short period, or do you want to make sure it opens for a minimum amount of a period before you shut it down?

There seems to be an evolution as you go through. Every event is different, which is appropriate. We relook at how you might be able to improve or tweak the circuit breakers based on the events that have occurred. Because at the end of the day you want to avoid shutting down the market. You want the markets to be open at the time when they really need to be open in those types of periods. So it's a balance, and I think as a policy you want to do it in truly extreme circumstances in a way that isn't creating more disruption when they are activated.

06:54 - 07:07

Kaitlyn Kiernan: These modifications to the market like Circuit Breaker weren't the only major changes to come in in the Flash Crash. That market event also led to the introduction of Limit Up/Limit Down. Can you tell us a bit about that?

07:07 - 07:55

Tom Gira: The circuit breakers are based off of the broad market move of a broad index like the S&P 500. But I think with the Flash Crash also showed as you can also have sort of the mini crashes on a stock by stock basis. And so the Limit Up/Limit Down structure was put in place. The best analogy I can think of to explain it is, I don't know if you've ever done this when you go bowling and you can put up the bumpers, so the ball won't go into the gutter? That's kind of like Limit Up/Limit Down and the stock market is the bowling ball.

What it's designed to do is there a reference price that is calculated throughout the day it's based off of a five minute moving average of the price of a particular security and then the Limit Up/Limit Down says OK you got 5 percent above and below that amount, and that's where the market can go. And so the ball can bounce off of the bumpers but it’ll keep rolling. If you do get into a situation where the national best bid is at that upper limit it goes into what's called a limit state. And if it doesn't bounce down from there, it will then go into a five-minute pause. They're not shutting for an entire day, but it's a way to sort of keep it in a band.

They're intended to complement each other. So if you have a single stock issued maybe there's news that hasn't been announced, but there's news in the marketplace, it's a way to sort of deal with that. And there could be volatility in certain sectors where the whole market may not reflect it in a way that might activate the circuit breaker. They are much more, I would say, flexible and that's not really a halt per se, it's more of a band and it could result in that, but usually it's just sort of to keep the stocks in a band in an orderly way to go up and down as that average might change.

08:51 - 09:02

Kaitlyn Kiernan: In an average day, how often might you see Limit Up/Limit Down triggering on different stocks and how does that compare to what we've seen more recently during this volatile period?

09:03 - 09:19

Tom Gira: You could probably measure in single digits or teens how many times a day that would happen and we saw during last couple of weeks that we hit a peak of a 1,475 activated in one day, and that was on March the 18th.

09:19 - 09:22

Kaitlyn Kiernan: That's a lot. So that's like a hundred times more than the usual.

09:23 - 09:25

Tom Gira: Yeah at least.

09:25 - 09:35

Kaitlyn Kiernan: That's pretty crazy. And I think there is one other type of volatility moderator for the market for short sales. How does that work?

09:35 - 10:01

Tom Gira: So multilayered thing. They're what are called the Short Sale circuit breakers. And this one is activated on a stock by stock basis and it looks at down 10 percent relative to, I think it's to the previous close that measures that. And when it is activated, short sales have to be executed in a stabilizing way. So you can't sell short at or below the bid when a stock is in that state. And it stays in that state for that day and the next day.

10:02 - 10:06

Kaitlyn Kiernan: How has the activation of the short sale breakers been showing up in recent weeks?

10:07 - 10:23

Tom Gira: I think 6,000 stocks were subject to it throughout March at various points, the list constantly changes because of which ones are moving 10 percent, but to put that in context, I think typically you'd have about 250 that were subject to it at any given time in the past.

10:23 - 10:41

Kaitlyn Kiernan: That's crazy. So these are very very outside numbers for all of these market volatility moderators. And even though there's been some extreme numbers with all of these different moderators what would you say about the overall resiliency of our market infrastructure in recent weeks?

10:41 - 11:12

Tom Gira: I've been very pleased with how the markets have done. I think the SEC gets a lot of credit. There was a regulation that they put in place a couple of years ago called Reg SCI, Regulation Systems Compliance and Integrity, and it requires entities like the exchanges and FINRA, for our critical systems, to make sure that they have capacity to withstand the volume surges or persistent volume surges, backup facilities, fail tests--all those things that you need to do to have sound technology. I think we're seeing the benefits of that.

We really haven't seen significant outages--I'm actually not aware of any, or has had an impact on the market, but also I think what I've been really pleased about is the infrastructure and the integrity of the technology is there, but also the compliance, and what I mean by that as you want markets to have good information flowing through them, because you want to be able to price the assets as best you can. And you want to have information that makes for a good audit trail, because we've got a monitor all of this. And so, there are things like trade reporting that have held up very well. We're seeing that there's 0.01 percent late trades coming into the systems, and that's terrific.

There's another regulation called Regulation National Market System Reg NMS, and there's a Lock/Cross rule and a trade-through rule that are part of Reg NMS. We're seeing for trade-throughs there is a 99.9 percent compliance rate, for Lock/Cross we're seeing 98 percent compliance rate. OATS, which is a hyper technical rule that requires firms to capture things down to the millisecond in terms of how an order makes its way through the system. And we're seeing compliance rates with OATS hanging at 99.9 percent.

Typically, in prior periods of extreme volatility, which might just be a day or two, you would see a degradation and the integrity of the data. And so, the fact that we've got more of a persistent time of extreme volatility, one I don't think we've ever experienced before, to have those compliance rates stay at those levels is impressive and I think the firms deserve a lot of credit. We have our job to do to make sure that people comply with those types of rules, but it shows that there are very sound systems in place at the firm level too. And that's terrific.

13:03 - 13:13

Kaitlyn Kiernan: It shows that those systems that's functioning even though many firms, just like FINRA are working remotely, and don't have staff on site so that's better.

13:13 - 13:21

Tom Gira: That’s right and I think it's automation. Once you've got something up and its programed properly comes a little portable.

13:21 - 13:55

Kaitlyn Kiernan: Well that's great, because I know that these compliance rates are important for your group in Market Reg to do their jobs, and we'll get into that a little bit more later when we talk about what your team is seeing in the different patterns that you run. Before we switch over to that, real quick, we've talked broadly about these volatility moderators and the market and all the volume out there, but I wanted to talk more specifically about the different markets starting with equity. How has the volume in the equity market compared to the average?

13:56 - 14:18

Tom Gira: In the equity markets, we've been looking at how they were in January of this year and comparing them to how they've been in the more volatile period, and we're starting that period was February the 24th. And as a percentage growth, right now we’re at about 81 percent. So, the market is 81 percent greater now than it was in January. I think that back in March it was maybe about 120 percent.

14:19 - 14:26

Kaitlyn Kiernan: FINRA is also responsible for overseeing the over-the-counter market. How are the numbers looking in the OTC markets?

14:26 - 15:00

Tom Gira: The over the counter market has actually held steady in terms of its market percentage. We're at about 37 percent right now and we were about 40 percent before the volatility. Looking back at prior periods of volatility, there was a tendency for the volume migrate to the exchanges and sort of away from the ATSs. And so, the fact that our volume was gone down about 3 percent is notable. And I think as we look at it, it looks like there was maybe more volume shifting to wholesalers that's allowing for the decline not to occur.

15:00 - 15:02

Kaitlyn Kiernan: And what about the bond market?

15:02 - 15:14

Tom Gira: In the corporate bond market we've seen about a 9 percent increase in the trade volume, but about a 25 percent increase in what's called par volume, the value of that trading.

15:14 - 15:23

Kaitlyn Kiernan: So more bigger trades in the bond market. And have there been any meaningful differences in the bond market between investment grade and high yield?

15:23 - 16:12

Tom Gira: The bond markets are more dis-aggregated than the exchange markets. It's much more difficult to price and trade in that market. There is of course our TRACE system that disseminates trade reports and obviously that helps firms in terms of a price. And there are some increasingly more electronic platforms for trading fixed income securities. But I think that market has probably been under more of a challenge than the listed markets and I think in the last two weeks the spreads relative to Treasury and other things, the spreads have sort of started to come back into alignment, not with the way they were before but less wide. And I think we're seeing that more so with respect to investment grade versus high yield. And also, I think you're seeing more stabilization with respect to the institutional market a little less so for the retail market. Hopefully that trend will continue.

16:13 - 16:25

Kaitlyn Kiernan: So, given all of this increase in volume across these markets and volatility generally, does anything change about FINRA's regulatory approach in this environment?

16:25 - 17:30

Tom Gira: Definitely. I would say prioritization and escalation are something that we are more actively doing. We want to focus on those issues that are creating more risk to the market, more risk to investors. So thankfully in terms of risk to the market if we saw a lot of late trade reports or no trade reports coming in from a firm that would be something that we would be picking up the phone and ask him what's going on. We really haven't had to do that as much this time. But in terms of the marketplace, we want to make sure --this has happened in the past, people will prey on volatile situations, you know natural disasters, pandemics--so Greg Ruppert, who just started recently and heads up what was formerly called OFDMA and now it's called the National Cause of Financial Crimes Detection Program, started a COVID-19 Task Force, because there are companies out there who are going to be claiming they've got a testing solution, vaccines and things like that. So that's in the works.

And we also are looking to make sure that we're connecting all the dots that we need to connect. So, we are having constant dialogue with staff from the SEC and the CFTC to compare notes in terms of what we're seeing and what we're doing. So, it's a long way of saying we're taking a risk-based approach in terms of how we are spending our time right now. We want to spend it in a way that maximizes the integrity of the market and that can be through focusing on manipulation, focusing on issues that relate to potential customer harm. So that's sort of how we approached it.

17:59 - 18:05

Kaitlyn Kiernan: That makes sense. And your team, are they all working remotely as well?

18:06 - 18:25

Tom Gira: Yes. We all went remote starting on March 16th. And it's another thing I've been very pleased with. Kudos to our CIO Steve Randich. I think, as an organization, FINRA was very well positioned to go remote. And it wasn't necessarily a new thing--the duration was new people--but people had been working remotely before this. So, it's gone fairly well.

18:25 - 18:36

Kaitlyn Kiernan: That's great. And speaking of Steve Randich and our technology, if we weren't using the cloud, where would your team be right now?

18:36 - 18:45

Tom Gira: You know I can't even think of it. The volumes we've been contending with and the need to run all the patterns and everything...we would be really really really challenged to what we need to do if we weren't in the cloud.

18:46 - 18:53

Kaitlyn Kiernan: How is the alert volume looking for your team relative to a more normal market period?

18:53 - 19:36

Tom Gira: That depends on the surveillance pattern. But in a nutshell, we have a variety of what we call cross market surveillance patterns and those are looking at things like layering and spoofing, auto-ex manipulation and other things where people might be trying to spread their activity out across multiple exchanges or broker dealers. Some patterns have experienced an increase of only 6 percent in the alerts. Others have experienced an increase I think the maximum was a 167 percent increase in the alerts. So, it sort of varies. And again, whenever there is this sort of volatility it can create a lot of false positives. That's something we need to wade through and we're hoping to quickly identify the false positives so we can spend time on the true alerts.

19:36 - 19:44

Kaitlyn Kiernan: I believe one of your surveillance patterns also looks at Best Execution. What are you seeing there in terms of alerts?

19:44 - 20:11

Tom Gira: I think right now we're seeing about a 10 percent increase in those alerts with respect to pricing in the fixed income market. That sounds like a very high number, and personally means more work for the analysts to be able to sort of see what were good, relevant prevailing market prices at different points. And that's harder when you have a volatile market, so something could look like a problem and may not be. But that's what our analysts will be doing is sifting through all those things then making the calls to make.

20:11 - 20:20

Kaitlyn Kiernan: And for firms who are looking to ensure that they are meeting their Best-Ex obligations--part of the rule includes the prevailing market conditions. How does that work?

20:21 - 21:10

Tom Gira: We actually added that to our Frequently Asked Questions related to COVID-19 and there is also a web page that people can go to, to find this information on FINRA's website. But we just reiterated that Best Execution has always been a multivariate analysis and it's based off of the stock, the marketplace, the timing, volatility, the liquidity, a variety of things and one of the factors that firms should be taking into consideration are the current market conditions. And so, we just sort of reiterated that rule isn't going away. It's still on the books but that during volatile periods like this there's a recognition that it might be more difficult to execute trades. And so that could mean weighing some factors more or less than others. It might be weighing speed to weighing the price if you really want to get out of a position.

21:11 - 21:22

Kaitlyn Kiernan: And I imagine the challenge is different for fixed income, which is generally less liquid than it is for equities which generally has much more liquidity in the market.

21:22 - 21:41

Tom Gira: The fixed income market it has its challenges and we want to make sure that notwithstanding that that the mark up, given all the conditions, that even though they might be a little higher that they are still reasonable and that people are still getting Best Execution of their orders while recognizing best execution factor is current market conditions.

21:41 - 21:53

Kaitlyn Kiernan: So, the CAT--the Consolidated Audit Trail--the SEC has made a couple announcements about that in recent weeks. Can you give a quick update on what they were and what they mean for firms?

21:53 - 22:24

Tom Gira: I think probably for firms one of the most significant ones...well they were both pretty significant...maybe in the short term, one that dealt with the timing of the roll out. So, the industry member reporting is slated to have started in April. And the SEC moved that implementation date to May the 20th. So, the first date that was up was April 16th was for equities and then we had options that would be in May. So, there could possibly be some further action by the Commission on this. That was the way it stands right now as the equity implementation date and the option date are within two days of each other and we like to have more of a buffer there for the firms. So, it is something that there is active discussion on as to whether there might need to be some additional adjustments to the dates.

But from a technological standpoint FINRA CAT cap has built the systems and they are ready to go. So, it really, it is intended to make sure and recognizing that because of COVID-19 firms might have had more difficulty testing and moving to remote and doing all those things simultaneously that the firms just needed a little bit more time given the conditions.

The commission also allowed us to handle some PII, the personal identifiable information. This is the information about specific customer accounts at the broker dealers. And so what it basically allows is that CAT would not be taking in PII with this new structure, that they would still have to give us an account number that would be unique to each account so that we can look at the account across all the broker dealers. But it takes out the need for a social security number or the need for a specific account number that is at a firm that's used for the customer.

It's got a hashing mechanism where you take a number and transform, it actually involves double hashing. And so I think it allows us to still have the benefits of the granularity of the data knowing that one particular participant can be identified wherever they are in the marketplace. But I think it goes a long way towards reducing CAT as a cyber target if there were to be a breach.  You'll hear some people refer to it now it's like phonebook data in terms of the extent to which we have information about specific customer accounts.

24:14 - 24:21

Kaitlyn Kiernan: Will it still allow for enhanced surveillance in terms of where there might be accounts operating in concert?

24:21 - 24:29

Tom Gira: Yeah. It doesn't compromise that uniqueness of the accounts. We just get to it in a different way with what the commission approved

24:30 - 24:38

Kaitlyn Kiernan: So, before we wrap up, what has most surprised you since this all began in earnest in mid-March?

24:38 - 25:08

Tom Gira: I would have to say the resiliency of the markets. I think just how the compliance rates have stayed at such a high level, capacity often something that was very hard to model in the past because the markets kept growing and growing and growing, and the volumes that we're seeing that the exchanges and FINRA and the clearing houses are able to contend with. It's been surprising. Again, I think a lot of credit goes to the S.E.C. for that with respect to adopting REG SCI.

I also think it's just how people have shifted to a remote work environment. Again, FINRA and all the firms, that was a pretty critical shift made pretty quickly. I think its sort of a thing to accelerate more and that we can for everybody sort of want remote. There were certainly some adjustments that went on, but it feels like things are sort of stabilized in terms of we still get information from firms when we need it. Sometimes they might need a little bit more time, but firms have been very responsive. Given all those things we've come through

25:32 - 25:52

Kaitlyn Kiernan: And the last question is, at the top, we talked about how the way our markets are regulated it's an evolutionary process. Circuit breakers evolved over time. If we were to see an evolution after this current situation what would you hope to see changed for our future?

25:52 - 26:42

Tom Gira: I would say two things. One would be including futures and equity and options more so with respect to CAT. We're spending a lot of time and effort to build two legs of a stool--and futures is third leg. And I think it would benefit the futures markets, it would benefit the CFTC, everybody. But I think every time we turn on the TV, they are showing the futures prices and they really have been, and it has happened in the past as well, the price discovery market in a lot of ways. And to do that holistic surveillance and knowing that the traders are certainly looking at all the arbitrage and how intertwined all these instruments are--I think for us to have that same intertwinement with how we do the surveillance by having that data together in an integrated way is necessary. Maybe this will be a catalyst to help people rethink that.

We talked about the fixed income market and I do think that we at FINRA have been very good advocates for transparency and I think we need to continue to push in that way. There's pre-trade transparency in the fixed income market. I think there's a growth in electronic platforms which has sort of pockets of maybe more pre-trade transparency. But I think we probably need to think about do we need to do more in that area as well

27:07 - 27:31

Kaitlyn Kiernan: Well, Tom, that's all my questions for this episode, but thanks so much for joining us for our second remote episode. Listeners, if you don't already make sure you subscribe to Senator unscripted on Apple Podcasts, Spotify or wherever you listen to podcasts. If you have any ideas for future episodes you can email us at [email protected] Until next time.

27:31 - 27:50

Kaitlyn Kiernan: Since the recording of this episode the SEC has further extended the CAT reporting timeline for broker dealers to June 22nd for equities and July 20th for options. For all the latest information please visit

27:50 - 28:18

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