In this latest FINRA Rule Filing, volatility is the name of the game. FINRA proposes for immediate effectiveness to exclude all rights and warrants from the trading pause pilot, that began June 2011.  FINRA Rule 6121.01 on a pilot basis provides for trading pauses in individual securities due to extraordinary market volatility (“Trading Pause Pilot”).

• The pilot program was developed and implemented as a market-wide initiative by FINRA and other SROs in consultation with SEC staff.  Initially, it was to cover only securities in the S&P 500 Index. [Phase I securities]
• The list the was expanded to include securities in the Russell 1000 Index and a specified list of ETPs (exchange traded products - ETFs, etc.). [Phase II securities]
• Recently the Trading Pause Pilot was expaned again, to include all remaining NMS stocks, which included rights and warrants. [Phase III securities]
• FINRA and other SROs continue to monitor trading activity determine when, or if, additional securities should be added.

Current Program Revision. Rather than add more securities to the pilot, FINRA and others are excluding all rights and warrants from the trading pause pilot.  This revision is based on the following analysis of trades:

Since adoption of the Pilot, over 25% of all trading pauses have occurred in rights and warrants.  The figure goes up to 52%, from the date that NMS (Phase III) securities were added to the Pilot.

Prices of RTS and WTS, like prices of equity options, are affected by the price of the underlying stock, as well as other factors - particularly the volatility of the stock.  It was found that the price of RTS and WTS can move more dramatically than the price of the underlying stock, even when trading in an orderly manner. This difference in trading behavior has resulted in scenarios whereby the rights and warrants trigger, and are subject to, a trading pause, even while the underlying stock continues to trade.  It's especially prevalent with lower-priced rights and warrants.

Accordingly, FINRA, along with the other SROs, agrees to exclude rights and warrants from the trading pause pilot of Rule 6121.01. For further details, go to:   [FINRA Rule Filing 11-68, 11/21/11].