What Was Rule 48?

Implemented in 2007, Rule 48 was a procedure the New York Stock Exchange (NYSE) could invoke to to establish order in the markets during periods of extreme volatility – specifically, to avoid panic-selling at the opening bell. But after it exacerbated big price swings during a hectic period in August 2015, the NYSE abolished it in July 2016, revising other regulations to cover such contingencies.

Rule 48 expedited the opening of stock market trading by suspending a daily requirement related to individual stock prices each morning. It waived requirements from another NYSE statute, Rule 123D, for a stock when it is evident that the equity in question was poised to open much higher or lower than the closing price from the previous day.

Typically, stock market floor managers must approve stock prices prior to the opening bell. But Rule 48’s implementation meant that this approval would not be necessary on that trading day for a particular stock.

Rule 48 was different than a circuit breaker, or collar, which halts trading during a trading session at times of extreme volatility. Circuit breakers are invoked during market hours at various levels: when Standard & Poor's 500 Index falls 7% (Level 1), 13% (Level 2), and 20% (Level 3) from the market’s closing level on the previous day. Trading can also be halted or suspended for an individual equity as well.

Rule 48, however, was invoked prior to market hours. Exchange leaders would determine prior to the market’s open if they anticipated panic trading prior to the session. Specific conditions to invoke the rule included:

• high levels of volatility in the trading session on the prior day (including days when circuit breakers were triggered)
• significant volatility in foreign markets
• significant selling in the futures market before the opening bell
• government announcements or major geopolitical events abroad

The Securities and Exchange Commission (SEC) formally approved Rule 48 on December 6, 2007, in the midst of concerns about a global recession. It was implemented on January 22, 2008. Though frequently amended, Rule 48 was invoked at least 77 times between September 2008 and September 2015, for reasons ranging from the spread of the European debt crisis (in May 2010) to a New York blizzard (in January 2015).

The rule was not without its critics, particularly because it allowed buyers and sellers to trade without a posted opening price. This lack could cause Investors to unknowingly sell stock to someone else at very low prices. The rule had the potential to cost investors with open market sell orders in place a lot of money if the price dropped far below the previous day's close.

This was the situation that occurred on August 24, 2015. The previous day, the Shanghai Composite Index had fallen 7.6% while the Shenzhen Composite slipped 7.2%. Rule 48 was invoked over concerns about the NYSE market’s exposure to these Chinese stock markets – the reference to foreign market volatility. The move resulted in highly disorderly trading, adversely affecting several stocks, and causing a record intraday drop in the Dow Jones Industrial Average. For example, Apple Inc. (AAPL) in the opening hour fell significantly, slumping to a low of $92 and allowing buyers to purchase shares at a very low level. Apple would rebound, closing the day at $108. But anyone who sold at market value when the price collapsed to $92 would have likely been able to sell at a higher level had Rule 48 not been invoked or they had used a limit order instead.

As a result of the chaos caused on that day and on the next two days, NYSE officials began rethinking Rule 48. On March 31, 2016, they filed a request with the SEC to delete it, stating: "based on the events of the week of August 24, 2015, when the Exchange declared extreme market volatility conditions on August 24, 25, and 26, the Exchange appreciates that the absence of any pre-opening indications may leave a void in the information available for market participants to assess the price at which a security may open." Instead, the NYSE proposed to revise Rule 15, requiring market makers to publish pre-opening indications if prices changed 5% or more, and Rule 123D, allowing securities to open electronically unless there was a price change of 4% or more.

The SEC approved the plans in July 2016, officially abolishing Rule 48.