What Is the Fast Market Rule?

The fast market rule is a rule in the United Kingdom that permits market makers to trade outside quoted ranges when an exchange determines that market movements are so sharp that quotes cannot be kept current. The purpose of the fast market rule is to maintain an orderly market during a time of chaos. Under the rule, market makers must turn off their computerized trading systems (called black boxes). They do not have to quote share prices based on the London Stock Exchange's screen prices while the fast market is in effect, but they are still required to make firm quotes.

Key Takeaways

  • The fast market rule is a rule in the United Kingdom that permits market makers to trade outside quoted ranges when an exchange determines that market movements are so sharp that quotes cannot be kept current.
  • The fast market rule is used in the United Kingdom, primarily in the London Stock Exchange (LSE), when a fast market occurs. (A fast market is a market that trades at a heavy volume and becomes chaotic, especially in terms of falling prices.)
  • When the fast market rule is enacted, market makers must turn off their computerized trading systems (called black boxes).
  • Market makers do not have to quote share prices based on the London Stock Exchange's screen prices while the fast market is in effect, but they are still required to make firm quotes.

Understanding the Fast Market Rule

The fast market rule is used in the United Kingdom, primarily in the London Stock Exchange (LSE), when a fast market occurs. A fast market is a market that trades at a heavy volume and becomes chaotic, especially in terms of falling prices. Fast markets are rare and are triggered by highly unusual circumstances. For example, the London Stock Exchange declared a fast market on July 7, 2005, after the city experienced a terrorist attack. Share prices were falling dramatically and trading was exceptionally heavy. 

Normally, shares must be traded within a certain range—quoted as the highest price a buyer will pay and the lowest price a seller will accept. Because it is virtually impossible to keep up with these ranges during a fast market, the fast market rule allows trades to happen outside those quoted ranges. This prevents the market from grinding to a halt because traders get stuck or confused. So, to facilitate the fast market rule, traders turn off their black boxes while the rule is in effect.

The fast market rule was created to keep the market trading when it became a fast market. Previously the only option during a fast market was to enact a circuit breaker, which triggers an automatic halt on trading when the market falls too quickly.

Fast Market Rule vs. Circuit Breaker

The fast market rule was created to replace the circuit breaker. According to some, the circuit breaker was harming the market by halting trading. A circuit breaker is a mechanism that allows an exchange to temporarily halt trading when prices decline sharply in order to prevent panic selling. Since halting the market prevents all exchange activity, it is healthier to continue trading while providing a way for traders to be unrestricted so they can trade freely without becoming confused or paralyzed. The fast market rule allows that to happen by forcing traders to trade without electronic assistance and allowing them to trade outside the quoted range.