Rule 48 sounds like a bad sequel to “Catch 22,” but it just might have prevented even more carnage in the markets Monday morning.
True, stocks made a remarkable recovery Monday after the Dow Jones Industrial Average plunged more than a 1,000 points at the open, but the situation sure looked dire before the opening bell. That why the NYSE invoked the rarely used Rule 48.
Just what is Rule 48? The New York Stock Exchange — which is part of Intercontinental Exchange (ICE) — has a number of tools to combat market turmoil, one of which is Rule 48.
Rule 48 Triggered by Extreme Volatility
When the NYSE employs Rule 48, designated market makers don’t have to disseminate price indications before the opening bell when volatility is seen having a floor-wide impact.
Designated market makers are there to ensure a fair and orderly market in stocks by providing constant liquidity. They step in to both buy and sell stocks when other trading partners can’t be found.
Ordinarily, stock prices have to be approved by NYSE floor managers before the stock can actually trade. Rule 48 cuts out that step, allowing DMMs to open stocks more quickly and easily.
That’s important when there’s a mad scramble to buy and sell shares.
The NYSE almost never employs Rule 48 — it hasn’t been used since the financial crisis — but when the futures market is indicating an unusually ugly day ahead, DMMs need all the help they can get.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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