SEC Proposes Market Circuit Breaker

by Glen Shapiro, LawAndTax-News.com, New York

21 May 2010

The US Securities and Exchange Commission (SEC) has filed proposed rules which would suspend trading in stocks subject to rapid movements in price.

The new rules have been proposed in response to the market disruption of May 6 and they would pause trading in certain individual stocks listed on US equity markets if the price moves 10% or more in a five-minute period. The SEC is seeking comment on the proposed rules.

These rules reflect a consensus that was achieved among the exchanges and the Financial Industry Regulatory Authority (FINRA) after SEC Chairman Mary Schapiro convened a meeting of exchange leaders and FINRA early last week. That meeting took place shortly after the market dropped significantly and after approximately 30 S&P 500 Index stocks mysteriously fell sharply over a short duration.

"We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges," said Schapiro. "As such, I believe it is important that all the exchanges quickly reached consensus on a set of uniform circuit breakers that would be triggered when needed. I am pleased by the constructive cooperation of the exchanges and FINRA as evidenced by their rapid response."

Under the proposed rules, which are subject to Commission approval following the completion of the comment period, 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. It is intended that the pause 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 trialled on a pilot basis until the close of trading on December 10, 2010.

The Commission intends to publish the proposed rules for a 10-day public comment period, and determine whether to approve them shortly thereafter.

"I believe that circuit breakers for individual securities across the exchanges would help to limit significant volatility. They would also increase market transparency, bolster investor protection, and bring uniformity to decisions regarding trading halts in individual securities," added Schapiro.

During the pilot period, Schapiro has asked the SEC staff to consider ways to address the risks of market orders and their potential to contribute to sudden price moves, as well as to consider steps to deter or prohibit the use by market makers of "stub" quotes, which are not intended to indicate actual trading interest.

The SEC also announced that its staff will study the impact of other trading protocols at the exchanges, including the use of trading pauses and self-help rules. The SEC staff also will continue to work with the exchanges and FINRA to improve the process for breaking erroneous trades, by assuring speed and consistency across markets.

None of the current circuit breaker rules were triggered on May 6. These circuit breakers apply across all equity trading venues and the futures markets.

Recommended