US regulator the Securities and Exchange Commission has approved new circuit breaker rules, which will be implemented by exchanges on 11 June.
The new rules will see trading paused in individual stocks across all US equity markets for five minutes should its price deviate by 10% in the preceding five-minute period. The circuit breakers will initially apply to constituents of the S&P 500 index and are designed to give the markets the chance to attract new trading interest in an affected stock and help to reestablish a reasonable price.
The rules will run on a pilot basis for six months, ending on 10 December. According to the SEC, the pilot phase will be used to make adjustments to the parameters or operation of the circuit breakers, with the hope of extending them to include other stocks.
The SEC took the action to introduce stock-specific circuit breakers following a brief but vertiginous crash in US markets on 6 May, when almost US$1 trillion in market value was wiped off the Dow Jones Industrial Average in under thirty minutes.
“The 6 May market disruption illustrated a sudden, but temporary, breakdown in the market’s price setting function when a number of stocks and exchange-traded funds 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.”
The SEC is also examining the use of market orders, stub quotes – orders placed by market makers well away from the reasonable market price to fulfill quoting obligations – and the impact of other trading protocols at the exchanges.