On the heels of the two year anniversary of the May 6, 2010 “flash crash,” the SEC has approved new proposals intended to protect against extreme market volatility by triggering trading suspensions.
The proposals, submitted by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA), were announced on June 1.
Among the initiatives is the establishment of a “limit up-limit down” mechanism that prevents trades in individual stocks from occurring outside of a specified price band.
That range would be set at a percentage level above and below the average price of the security over the immediately preceding five-minute period. For more liquid securities — those in the S&P 500 Index, Russell 1000 Index, and certain exchange-traded products — the level will be 5 percent. For other listed securities, the level will be 10 percent. The percentages will be doubled during the opening and closing periods and broader price bands will apply to securities priced $3 per share or less.
To accommodate more fundamental price moves, there would be a five-minute trading pause (similar to one triggered by the current circuit breakers) if trading is unable to occur within the price band for more than 15 seconds. The new system will replace the existing single-stock circuit breakers that were approved on a temporary basis after the “flash crash” of May 6, 2010.
All trading centers -- including exchanges, automated trading venues, and broker-dealers executing trades -- will be required to establish policies and procedures that prevent trades from occurring outside the applicable price bands and honor any trading pause.
Another initiative updates existing market-wide circuit breakers that, when triggered, halt trading in all exchange-listed securities throughout the U.S. markets. The existing market-wide circuit breakers were adopted in October of 1988 and have been triggered only once, in 1997. The changes lower the percentage-decline threshold for triggering a market-wide trading halt and shorten the amount of time that trading is suspended.
The revised market-wide circuit breaker rules update the existing ones by:
Reducing the market decline percentage thresholds needed to trigger a circuit breaker to 7, 13, and 20 percent from the prior day's closing price, rather than declines of 10, 20, or 30 percent.
Shortening the duration of trading halts that do not close the market for the day to 15 minutes, from 30, 60, or 120 minutes.
Simplifying the structure of the circuit breakers so that there are only two relevant trigger time periods, those that occur before 3:25 p.m. and those that occur on or after 3:25 p.m. The two periods replace the current six-period structure.
Using the broader S&P 500 Index, rather than the Dow Jones Industrial Average, as the pricing reference to measure a market decline.
Requiring the trigger thresholds to be recalculated daily rather than quarterly.
Both proposals were approved for a one-year trial period. The exchanges and FINRA will implement the changes by Feb. 4, 2013.
The SEC is also considering additional measures, including establishing a consolidated audit trail system to better track orders and trades in securities across the national market system.