SEC Approves Implementation of Stock-Specific Circuit Breakers
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Federal regulators approved new so-called "circuit breakers" on Thursday in an effort to prevent any future recurrence of the “flash crash” that caused the supposedly unexplained market drop on May 6. The Securities and Exchange Commission said that the new rules could be implemented into the U.S. markets as soon as Friday.
The rules will require that exchanges pause trading in certain large stocks in the U.S. equities market if the share price falls more than 10 percent within a five-minute timeframe.
"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. "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."
A high level of fragmentation and lack of liquidity were viewed as the two biggest factors which could have caused the rapid drop in stock prices during the flash crash.
The SEC said that the new circuit breaker rules will be in place on a “pilot basis” through December 10, at which time trading curbs will be looked at and may be expanded. Currently the new rules only apply to the S&P 500 index.
"It is my hope to rapidly expand the program to thousands of additional publicly traded companies," Schapiro added.
The SEC added that it will consider ways to respond to the risks present in the market orders and the potential for sudden market shifts, while also looking into ways to deter or eliminate the use of “stub quotes,” which are not intended to indicate the actual trading interest.
The rules will require that exchanges pause trading in certain large stocks in the U.S. equities market if the share price falls more than 10 percent within a five-minute timeframe.
"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. "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."
A high level of fragmentation and lack of liquidity were viewed as the two biggest factors which could have caused the rapid drop in stock prices during the flash crash.
The SEC said that the new circuit breaker rules will be in place on a “pilot basis” through December 10, at which time trading curbs will be looked at and may be expanded. Currently the new rules only apply to the S&P 500 index.
"It is my hope to rapidly expand the program to thousands of additional publicly traded companies," Schapiro added.
The SEC added that it will consider ways to respond to the risks present in the market orders and the potential for sudden market shifts, while also looking into ways to deter or eliminate the use of “stub quotes,” which are not intended to indicate the actual trading interest.
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