Systems Information - AEMI - How Spread Tolerance Works Browser's "Print background colors" option should be ON

 
How Spread Tolerance Works
 
Spread tolerance is a parameter set by the Exchange and published in the Amex rules. It represents the price range that a single, incoming order may execute from its first trade on AEMI, and its purpose is to reduce volatility caused by a single order. A breach of spread tolerance signals an imbalance in the security, therefore auto-ex is disabled and the Specialist steps in. Spread tolerance is based on the price of the first execution at the Amex. The tolerances are published in the proposed Amex rules and the parameters are as follows:

Spread Tolerance Table
Stock PriceTolerance
Less than $55 cents
$5 - $1515 cents
More than $1525 cents
 
Example 1:
The best bid on AEMI is $8.65 for a given stock when a sell order arrives. Based on the table, the tolerance is 15 cents because the bid price is currently between $5-$15. The sell order will walk down the individual price points on the AEMI book to $8.51. If the volume at $8.51 is exhausted auto-ex is disabled. If there is remaining buyer interest at $8.51 and the sell order is completed, then auto-ex remains on.

Example 2 (see below):
The national best bid in the market is $8.66, which is a protected quotation belonging to an away market center. An order to sell 7000 shares arrives on AEMI. Two intermarket sweep orders are automatically generated, one to Market A for 200 shares at $8.66, and one to Market B for 300 shares at $8.65. The balance of 6500 shares walks down the AEMI book. The first execution on Amex is at $8.63, and the spread tolerance of 15 cents is calculated from this price. The spread tolerance price is $8.48. The order therefore trades at every price point on AEMI down to, and including, $8.48, resulting in a sale of 4,100 shares on AEMI. The order will have been filled on 500 shares away and 4100 on AEMI, totaling 4,600 shares. The stock at the spread tolerance price of $8.48 is exhausted, and the order is only partially filled. AEMI will immediately disable auto-ex and publish a manual quote of the balance on one side at the best automated offer, and the AEMI best bid on the other, i.e. $8.47 x $8.68: 100 x 2400.

 
 
FAQs

Will spread tolerance stop any kind of price swing?
No. Spread Tolerance limits only the large movement in one direction caused by a single order. It should be viewed in conjunction with Momentum Tolerance and Gap Trades.

Will the amount of trades and volume affect the breach of spread tolerance?
No. The concept of Spread Tolerance is solely based on the price differential between the first price fill on a single order and its subsequent price fills.

What if there is no stock at the level of the spread tolerance breach?
If in the above example there were no bid at all at $8.48, the manual quote would still be $8.47 x $8.49: 100 x 3600.