US stock exchanges have filed requests with national regulator the Securities and Exchange Commission (SEC) to extend the reach of existing circuit breakers to include all National Market System (NMS) stocks, that is, all stocks listed on the markets operated by Nasdaq OMX and NYSE Euronext.
The circuit breakers impose a halt on trading in an individual stock for five minutes in the event of it falling or rising 10% or more in the previous five-minute period.
They were approved 16 June 2010 on a pilot basis following the ”flash crash' of 6 May 2011, and originally applied to stocks in the Standard & Poor's 500 index, although this was extended to stocks in the Russell 1000 index in September 2010.
The pilot is currently expected to run until 11 August 2011, having been extended twice by a period of four months.
In order to adopt the proposed changes to the pilot scheme, the primary listing markets will apply different trigger percentages of 30% for NMS stocks priced equal to or greater than US$1 per share that are not included in the S&P 500, the Russell 1000 or the specified list of exchange-traded products, and 50% for NMS stocks priced below US$1 per share that are not included in the existing list of instruments.
Applying a broader percentage to securities priced less than US$1 compared to those priced is intended to reflect that lower-priced securities tend to be more volatile, and price movements of lower-priced securities can equate to a higher percentage move than a similar price change for a higher-priced stock.
The SEC and sell-side trade body the Financial Industry Regulatory Authority (FINRA) recently confirmed that they plan to establish a new ”limit up/limit down' mechanism to address extraordinary market volatility in US equity markets.
The proposed mechanism would prevent trades in listed equities from occurring outside of a specified price band, which would be set at a percentage level above and below the average price of the security over the preceding five-minute period. Initially it was proposed that this would be 5% for stocks subject to the circuit breaker and 10% for those outside of the scheme.
FINRA and the SEC are currently inviting public comment on the proposals which will supersede the existing circuit breakers, should they be approved.