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SEC approves 'flash crash' response rules
Today 3:44 PM ET (MarketWatch) Print
WASHINGTON (MarketWatch) -- Seeking to avoid another "flash crash" like the one that rattled markets on May 6, 2010, the Securities and Exchange Commission on Friday announced it had approved two long-awaited proposals seeking to limit the kind of extraordinary market volatility seen on that day.
"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 Schapiro.
Both proposals were approved for a one-year trial period.
One approved proposal, dubbed a "limit up and limit down" mechanism, requires that trades in listed stocks would have to be executed within a range tied to recent prices for that security.
The mechanism becomes effective on Feb. 4, 2013. It will replace a circuit-breaker program the agency adopted in May 2011 and expanded in September 2011 to halt or slow down trades of a particular stock if the price moves 10% or more in a five-minute period. With the new rule, there would be a five-minute pause if trading is unable to occur within the price band for more than 15 seconds.
The agency also updated existing market-wide circuit breakers that, when triggered, halt trading in all exchange-listed securities throughout the U.S. markets.
The previous market-wide circuit breakers were approved in 1988 and were used only once, in 1997. The new circuit breakers lower the percentage decline threshold for triggering a market-wide trading halt and shorten the amount of time that the trading is halted for.
With the new rule, U.S. stock markets would stop trading for 15 minutes if the S&P 500 ( SPX) drops by 7%, 13% or 20% from the prior day's closing price. This replaces the previous rule's 30-minute, 60-minute or 120-minute trading halts.
Also the new rule uses the S&P 500 index as a trigger instead of the Dow Jones Industrial Average ( DJIA) . The previous market-wide circuit breakers were not triggered during the market disruption in May 6, 2010, leading to discussions about whether the breakers needed to be updated.
During the May 6 market tumble, the Dow Jones Industrial Average dropped nearly 1,000 points before recovering some ground to a 348-point loss.
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