The Securities and Exchange Commission (SEC) is proposing that shorter price falls trigger market-wide circuit breakers to address the risk of future flash crashes in US securities markets.
Modifications outlined by the regulator to market-wide circuit breakers designed to curb volatility, include reducing the percentage price change thresholds necessary to trigger a circuit breaker, shortening the duration of the resulting trading halts and changing the reference index used to measure a market decline.
The key change – which falls broadly in line with industry recommendations tabled year – sees the first market-wide circuit breaker trigger after only a 7% slide in stocks, instead of the present 10%. Further triggers would come at 13% and 20% instead of the current 20% and 30% from the prior day's closing price.
New stock-specific circuit breakers were first announced 12 days after the 6 May 2010 temporary collapse of share prices in a 20-minute period, which saw the Dow Jones Industrial Average briefly plunge 998.5 points, wiping approximately $1 trillion from the market before recovering. The stock-specific circuit breakers pause trading in individual securities for five minutes if the price moves 10% or more in a five-minute period.
Market-wide circuit breakers were originally adopted in the US in October 1988 and have only been triggered once in 1997. The SEC yesterday opened its new proposal to a 21-day public comment period.
The commission is also considering establishing a ”limit up-limit down' mechanism to address flash crashes in individual securities.
“This new market-wide circuit breaker, together with the other post-flash crash measures, is designed to reduce extraordinary volatility in our markets,” said SEC chairman Mary Schapiro. “We look forward to reviewing the comments, including any views on how the proposed circuit breaker changes might work together with the proposed limit up-limit down mechanism for individual securities.”
Under the proposal, the SEC would also shorten the duration of resulting trading halts from 30, 60, or 120 minutes to just 15 minutes and simplify the structure of the circuit breakers, so that instead of the present six trigger time periods, there would only be two trigger time periods – before 3.25pm and on or after 3.25pm.
Trigger thresholds would be recalculated daily rather than quarterly and instead of using the Dow Jones Industrial Average, the SEC would use the broader S&P 500 Index as a pricing reference to measure a market decline.