SEC Approves Proposals
to Address Extraordinary Volatility in Individual Stocks and Broader
June 4, 2012
Securities and Exchange Commission has approved two proposals submitted
by the national securities exchanges and the Financial Industry
Regulatory Authority (FINRA) that are designed to address extraordinary
volatility in individual securities and the broader U.S. stock market.
One initiative establishes a “limit up-limit down” mechanism that
prevents trades in individual exchange-listed stocks from occurring
outside of a specified price band. When implemented, this new mechanism
will replace the existing single-stock circuit breakers that the
Commission approved on a pilot basis after the market events of May 6,
The second initiative updates existing market-wide circuit breakers that
when triggered, halt trading in all exchange-listed securities
throughout the U.S. markets. The existing market-wide circuit breakers
were adopted in October 1988 and have been triggered only once, in 1997.
The changes lower the percentage-decline threshold for triggering a
market-wide trading halt and shorten the amount of time that trading is
The exchanges and FINRA will implement these changes by February 4,
2013. On Thursday, the Commission approved both proposals for a one-year
pilot period, during which the exchanges, FINRA, and the Commission will
assess their operation and consider whether any modifications are
“The initiatives we approved are the product of a significant effort to
devise a sophisticated, yet workable and effective way to protect our
markets from excessive volatility," said SEC Chairman Mary L. Schapiro.
“In today’s complex electronic markets, we need an automated and
appropriately calibrated way to pause or limit trading if prices move
too far too fast. The Commission, along with the exchanges and FINRA,
will be closely monitoring the operation of the new limit up-limit down
and market-wide circuit breaker processes during the pilot period to
make sure any rules approved on a permanent basis are as effective as
they can be."
“Limit Up-Limit Down” Plan for Individual Securities
The “limit up-limit down” mechanism, established jointly by the
exchanges and FINRA, prevents trades in individual listed equity
securities 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 immediately preceding five-minute period. For more
liquid securities — those in the S&P 500 Index, Russell 1000 Index, and
certain exchange-traded products — the level will be 5 percent, and for
other listed securities the level will be 10 percent. The percentages
will be doubled during the opening and closing periods and broader price
bands will apply to securities priced $3 per share or less.
To accommodate more fundamental price moves, there would be a
five-minute trading pause, similar to the pause triggered by the current
circuit breakers, if trading is unable to occur within the price band
for more than 15 seconds.
Under the new plan all trading centers, including exchanges, automated
trading venues, and broker-dealers executing trades internally, must
establish policies and procedures to prevent trades from occurring
outside the applicable price bands, honor any trading pause, and
otherwise comply with the procedures set forth in the plan.
Updated Market-Wide Circuit Breakers
The revised market-wide circuit breaker rules update the existing rules
the market decline percentage thresholds needed to trigger a circuit
breaker to 7, 13, and 20 percent from the prior day’s closing price,
rather than declines of 10, 20, or 30 percent.
Shortening the duration of
trading halts that do not close the market for the day to 15
minutes, from 30, 60, or 120 minutes.
Simplifying the structure of
the circuit breakers so that there are only two relevant trigger
time periods, those that occur before 3:25 p.m. and those that occur
on or after 3:25 p.m. The two periods replace the current six-period
Using the broader S&P 500
Index, rather than the Dow Jones Industrial Average, as the pricing
reference to measure a market decline.
Requiring the trigger
thresholds to be recalculated daily rather than quarterly.
circuit breakers were not triggered during the severe market disruption
of May 6, 2010, which led the exchanges and FINRA, in consultation with
SEC staff, to assess whether the circuit breakers needed to be updated
in light of today’s market structure. In addition, the Joint CFTC-SEC
Advisory Committee on Emerging Regulatory Issues recommended in February
2011 that the SEC and CFTC review the current operation of the
market-wide circuit breakers, and consider appropriate modifications.
In addition to the single-stock circuit breaker pilot program, the SEC
has undertaken other initiatives in the wake of May 6, including:
Approving new exchange and FINRA
rules clarifying how and when erroneous trades would be broken.
Approving new exchange and FINRA
rules to strengthen the minimum quoting standards for market makers and
effectively prohibit “stub quotes” in the U.S. equity markets.
Adopting a rule requiring
broker-dealers to have risk controls in place before providing their
customers with access to the market.
Adopting a rule establishing a
large trader reporting system to enhance the Commission’s ability to
identify large market participants and collect information on their
The SEC staff also is
considering what additional measures may be needed, including
establishing a consolidated audit trail system to better track orders
and trades in securities across the national market system.