US regulator the Securities and Exchange Commission (SEC) has approved new rules to expand its circuit breaker programme to include all constituents of the Russell 1000 index and certain exchange-traded funds.
The circuit breakers were originally launched for S&P 500 stocks in June following the 'flash crash' of 6 May, which saw the Dow Jones Industrial Average index plunge by US$1 trillion in market value in a matter of minutes before rebounding just as sharply. The programme requires exchanges to pause trading in certain individual stocks for five minutes if the price moves by 10% or more in the preceding five minute period. The scheme is currently running on a pilot basis until 10 December 2010 and the addition of new stocks is due to take place early this week.
According to the SEC, the pause is intended to “allow markets an 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 also approved the rules that clarify the process for breaking erroneous trades, making it clearer when, and at what prices, trades will be broken by the exchanges and independent regulatory body Financial Industry Regulatory Authority (FINRA).
Under the new rules, stocks priced US$25 or less trades will be broken if the trades are at least 10% away from the circuit breaker trigger price. For stocks priced more than $25 to $50, the figure is 5%, and for stocks priced more than $50, the threshold is 3%.
Where circuit breakers are not applicable, the exchanges and FINRA will break trades at specified levels involving multiple stocks depending on how many stocks are involved. For events involving between five and 20 stocks, trades will be broken if they are at least 10% away from the reference price, typically the last sale before pricing was disrupted. For events involving more than 20 stocks, trades will be broken if they are at least 30% from the reference price.
“These circuit breakers and this more objective guidance on breaking erroneous trades will help our markets retain the confidence of investors and companies,” said SEC chairman Mary Schapiro. “We have worked quickly with the exchanges to take these steps, and we will continue to be very focused on addressing weaknesses exposed on May 6.”
The SEC is also considering the recalibration of market-wide circuit breakers currently operating across all equity trading venues and futures markets under its jurisdiction, and whether market makers should be subject to further obligations to promote ”fair and orderly' markets.