Q&A: Jan checks in on LRPs

By: Ray Pellecchia

File Under: NYSE, NYSE

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My favorite German student has not been slacking off this summer. He writes:

Hi Ray,

it\'s me from germany and my dissertation is still in progress. Today the new LRP definitions posted on the website und I was very interested about it.

The categories in connection with the price per share and the average daily share volume make sense.

One thing consider me: The parameters in the >4.000.000 and 4.000.000 - 500.000 range are the same? There's no differentiation between these two ranges?

Further the recalculating step (scheduled every 5 minutes):
It sounds like finding a trade off between a static and a dynamic corridor. Trades are motivated to stabilize (in a range) the share price for a "short time".
When anyone want to buy/ sell at a larger price step, he or she would send an order not in the period, but rather short before the 5 minutes period ends.

I know here in germany a concept called volatility interruption and there are two "LRP's" one based in the last traded price and one on the price of the last auction.

Your system combine these two elements. Is this correct? Or can you tell me more about the reasons to choose these concept and the benefits?

Many thanks and greetings

Jan

Jan -- Good to hear from you. Hope the dissertation is going well.

We have indeed filed with the SEC a new proposal that amends several aspects of the NYSE Hybrid Market, including the Liquidity Replenishment Point. I emphasize the word proposal because this is still pending the SEC's review, and therefore not yet final.

You're correct that the LRP values in those two volume categories are currently set the same. But please note that we've also proposed to evaluate the LRP after a three-month period to determine whether any changes are needed. So the LRP levels in the various categories are subject to possible change down the road, and having the separate volume categories gives us a structure to make a change if appropriate.

Also, please note that the LRP will be recalculated every 30 seconds, not 5 minutes. The values themselves were determined using 5-minute intervals and the price movements during those periods. The values stay static but are freshly applied to bids and offers every 30 seconds.

I'm not familiar enough with the German volatility interruption you mentioned to compare it with our LRP. We made this change to gain the following benefits:

• The LRPs originally filed were complex and not easily understood, so we have proposed a single, simpler LRP.

• The newly proposed LRP is expected to be triggered no more than approximately 500 times a day. To me, this underscores our commitment to be a "fast market" the overwhelming majority of the time, giving customer continuous, electronic access to our best prices. At the same time, the LRP will still enable our auction to help moderate volatility in instances of extreme price movement or market stress.

I hope that helps. Good luck with the paper!