Source: SEC Signs Off on Stock Market 'Circuit Breakers'
heute 16:55 • Dow Jones
By Fawn Johnson
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- Trading exchanges as early as next week will implement rules designed to tame the volatility of individual stocks by temporarily halting trading during dramatic price changes, even as market participants are bracing for stiffer rules.
Members of the U.S. Securities and Exchange Commission have signed off on the stock market "circuit breaker," according to a person with knowledge of the situation.
The rule will be in effect on a pilot basis for six months.
The cross-market trading pause was proposed last month in response to the May 6 "flash crash" that saw the Dow Jones Industrial Average plummet almost 1,000 points before partially recovering.
All exchanges will halt trading for five minutes when an individual stock price moves 10% or more in five minutes. The pause is designed to give traders time to catch their breath and assess whether a stock's price change stems from a real shift in value or an unrelated market hiccup.
The SEC considers the stock-by-stock circuit breaker rule to be the first step of several to curb damage caused by unusual market fluctuations like those seen on May 6. Regulators haven't pinpointed a single cause for the incident and are saying it was caused by a confluence of events.
The financial industry generally supports the circuit breaker, but most observers and regulators agree that it alone won't stop another "flash crash" from occurring.
Right now, the circuit breaker applies only to stocks contained on the S&P 500 index. It doesn't cover smaller cap stocks or index-based products such as exchange-traded funds, which were some of the stocks most dramatically affected on May 6.
SEC officials say they expect the list of covered stocks to expand.
"I am concerned that by limiting the rules to the issuers in the S&P 500, other issuers will be vulnerable to continued market volatility," said Rep. Melissa Bean (D., Ill.) in a letter to the SEC.
The Issuer Advisory Group suggested that regulators include an "opt-in" provision that would permit non-S&P 500 companies to elect to participate.
Other people commenting about the rule are concerned about the market disruptions outside of the 9:45 a.m. to 3:45 p.m. window when the circuit breaker would be in effect. TD Ameritrade Inc. (AMTD) said 10% to 15% of its trades on any given day are placed overnight to be executed at market open, leaving those stocks vulnerable for 15 minutes.
As a next step, the SEC is looking to ban "stub quotes"--placeholder prices that tend to be far from an actual market price. Normally those trades won't get executed. But investigators believe that on May 6 some trades were executed unintentionally at stub-quote prices.
The SEC also is eyeing certain types of buy and sell orders for further regulation. SEC Chairman Mary Schapiro has identified market orders (orders to buy or sell at market price without regard to fluctuations) and stop-loss orders (orders to sell when a stock falls to a certain price). Investigators of the flash crash believe those types of orders could have accelerated the market drop.
Regulators also will be keeping an eye on different exchanges' rules to curb market volatility. NYSE Euronext Inc. (NYX) has a protocol that halts trading for various stocks under certain circumstances. Nasdaq OMX Group Inc. (NDAQ) announced a similar system last week that it says is designed to complement the stock-by-stock circuit breaker rule.
Knight Capital Group Inc. (KCG) said in a letter to the SEC that the NYSE and Nasdaq protocols, combined with SEC rules on market pauses, "could all be triggered during volatile market periods, creating a great deal of confusion and uncertainty."
-By Fawn Johnson, Dow Jones Newswires; 202-862-9263; fawn.johnson@dowjones.com
(END) Dow Jones Newswires
June 10, 2010 10:55 ET (14:55 GMT)
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