SEC Approves 'Circuit Breaker' Rules

by Glen Shapiro, LawAndTax-News.com, London

14 June 2010

The US Securities and Exchange Commission (SEC) has approved rules that will require the exchanges and the Financial Industry Regulatory Authority (FINRA) to pause trading in certain individual stocks if the price moves rapidly over a short time span.

The rules, which were proposed by the national securities exchanges and FINRA and published for public comment, come in response to the market disruption of May 6.

The SEC anticipates that the exchanges and FINRA will begin implementing the newly-adopted rules as early as Friday, June 11.

"The May 6 market disruption illustrated a sudden, but temporary, breakdown in the market's price setting function when a number of stocks and ETFs were executed at clearly irrational prices," said SEC Chairman Mary Schapiro, who convened a meeting of the exchange leaders and FINRA at the SEC following the market disruption. "By establishing a set of circuit breakers that uniformly pauses trading in a given security across all venues, these new rules will ensure that all markets pause simultaneously and provide time for buyers and sellers to trade at rational prices."

Under the rules, trading in a stock would pause across US equity markets for a five-minute period in the event that the stock experiences a 10% change in price over the preceding five minutes. According to the SEC, the pause, which would apply to stocks in the S&P 500 Index, would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion. Initially, these new rules would be in effect on a pilot basis through December 10, 2010.

If the pilot is successful, the scope of the new rules could be widened to include securities beyond the S&P 500, including ETFs.

"It is my hope to rapidly expand the program to thousands of additional publicly traded companies," added Schapiro.

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