New Market-Wide Circuit-Breaker Proposal

News Brief

By Cydney Posner

The most recent market volatility has prompted the exchanges, FINRA and the SEC to propose new more sensitive market-wide circuit breakers. According to the press release (as the rule proposal has not yet been posted), the new proposals would revise the existing circuit breakers as follows:

  • Reduce the market decline percentage thresholds necessary to trigger a circuit breaker from 10%, 20% and 30% to 7%, 13% and 20% from the prior day's closing price.
  • Shorten the duration of the resulting trading halts that do not close the market for the day from 30, 60 or 120 minutes to 15 minutes.
  • Simplify the structure of the circuit breakers so that there are only two (as opposed to six) relevant trigger time periods — those that occur before 3:25 p.m. and those that occur on or after 3:25 p.m.
  • Use the broader S&P 500 Index as the pricing reference to measure a market decline, rather than the DJIA.
  • Provide that the trigger thresholds are to be recalculated daily rather than quarterly.

The circuit breakers are being reevaluated in light of the fact that they were not triggered during the severe market disruption of May 6, 2010. Other SEC initiatives to address this market disruption include the following:

  • Rules that require the exchanges and FINRA to pause trading in certain individual securities if the price moves 10% or more in a five-minute period. This pilot program applies to all exchange-listed stocks and exchange-traded products.
  • New exchange and FINRA rules clarifying how and when erroneous trades would be broken.
  • New exchange and FINRA rules to strengthen the minimum quoting standards for market makers and effectively prohibit "stub quotes" in the U.S. equity markets.

The SEC also is considering a proposal by the exchanges and FINRA to establish a "limit up-limit down" mechanism to address extraordinary market volatility in individual securities. See my article  of 4/5/11.

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