By Cydney Posner

Today, FINRA filed with the SEC a proposal to establish a new "limit up-limit down" mechanism to address extraordinary market volatility in U.S. equity markets.  The system is intended to be a more sophisticated replacement for the existing single stock circuit breaker pilot program. Under the proposal, trades in listed stocks would have to be executed within a percentage range above and below the average price of the security over the immediately preceding five-minute period. For stocks currently subject to the circuit breaker pilot, the percentage would be 5% and for those not subject to the pilot, the percentage would be 10%. Those percentages would be doubled during the opening and closing periods. Broader percentage price "bands" would apply to stocks priced below $1.00. If trading is not possible within the price band for more than 15 seconds, there would be a five-minute trading pause, much like the current circuit breakers. (Under the current circuit breaker pilot, there is a five-minute trading pause for a stock if it experiences a 10% price change over the preceding five minutes.) The press release notes that, although "the circuit breakers have been effective in moderating potentially extraordinary volatility, they also have been triggered by erroneous trades. As a result, Chairman Schapiro has encouraged the exchanges and FINRA to develop a more sophisticated mechanism that not only would prevent an erroneous trade from triggering a trading pause, but keep the erroneous trade from occurring in the first place." There will be a 21-day comment period on the proposal.

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