The nation’s stock exchanges and the Financial Industry Regulatory Authority are filing proposals that will trigger halts in trading, market-wide, more quickly, the Securities and Exchange Commission said.

The changes are proposed for market-wide "circuit breakers,'' which key off drops in the Dow Jones Industrial Average.

The revisions, which among other things cut down the size of the drop that would trigger a circuit breaker by a third, are designed to address extraordinary volatility across the securities markets.

On May 6, 2010, the Dow Jones Industrial Average dropped roughly 600 points in five minutes before snapping back. In the first full week of August, the nation’s stocks moved up or down more than 400 points for four days in a row, a first.

When triggered, these circuit breakers halt trading in all exchange-listed securities throughout the U.S. markets.

The proposals would revise the existing market-wide circuit breakers by:

  • Reducing the market decline percentage thresholds necessary to trigger a circuit breaker from 10, 20, and 30 percent to 7, 13, and 20 percent from the prior day’s closing price.
  • Shortening the duration of the resulting trading halts that do not close the market for the day from 30, 60, or 120 minutes to 15 minutes.
  • Simplifying the structure of the circuit breakers so that rather than six 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.
  • Using the broader S&P 500 Index as the pricing reference to measure a market decline, rather than the Dow Jones Industrial Average.
  • Providing that the trigger thresholds are to be recalculated daily rather than quarterly.

The circuit breakers provide for market-wide trading halts revolve around the Dow Jones Industrial Average (DJIA).
Currently, the 10 percent market-wide circuit break would be enacted if the DJIA drops 1,050 points. Trading would be halted for 30 minutes.

The percentage in this case would be dropped to 7 percent and the point drop would be in the neighborhood of 700 points. The actual point thresholds get set quarterly, in advance.

If trading resumes and there are further declines, the additional thresholds come into play. And market trading halts for longer periods of time: As much as two hours in the second case and for the day, in the third case.

Existing market-wide circuit breakers were not triggered during the Flash Crash of May 6, 2010.

But 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.

The SEC will seek comment on the proposed rule changes, which are subject to Commission approval following a 21-day public comment period.

-- This article first appeared on Securities Technology Monitor.



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