The US Securities and Exchange Commission (SEC) plans to introduced rules that would halt trading in individual stocks if their price moves by more than 10% in a five-minute period.
The new all-venue circuit breaker is designed to prevent a repeat of the sharp fall in US stock prices on 6 May, when volatility in individual stocks saw the Dow Jones Industrial Average slump by almost 10% in afternoon trading. Approximately 30 S&P 500 Index stocks dropped in value by 10% or more percent in a five-minute period, but most of the losses were recovered by the close of trading.
According to the SEC, the proposed five-minute pause in trading, which would apply across all US equity markets, would give the markets the opportunity to “attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion”.
The SEC said it would seek comment on the proposed new rules, filed yesterday by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA), but said it expected to launch a pilot scheme in early June. Full implementation of the circuit breakers is expected on 10 December.
“The markets are proposing these rules in consultation with FINRA and staff of the SEC to provide for uniform market-wide standards for individual securities in the S&P 500 Index that experience a rapid price movement,” the US securities markets regulator confirmed.
A number of market observers claimed that the sharp dip in prices experienced on 6 May was caused by a lack of coordination between exchanges. While the New York Stock Exchange (NYSE) slowed down its trading to allow more liquidity into the market, other electronic-only exchanges continued trading, routing orders past the NYSE, often to trading venues containing very thin order flow.
“We continue to believe that the market disruption of 6 May was exacerbated by disparate trading rules and conventions across the exchanges,” said SEC chairman Mary Schapiro. “As such, I believe it is important that all the exchanges quickly reached consensus on a set of uniform circuit breakers that would be triggered when needed. I am pleased by the constructive cooperation of the exchanges and FINRA as evidenced by their rapid response.”