The Securities and Exchange Commission Friday approved the expansion of its post-Flash Crash circuit breaker program to include all stocks in the Russell 1000 Index and a test group of exchange-traded funds.
The SEC also approved new rules for national exchanges and the Financial Industry Regulatory Authority to follow that clarify the process for breaking erroneous trades, in cases such as the May 6 Flash Crash, when prices fall (or rise) precipitously.
The expansion of the program is expected to take place on the New York Stock Exchange, Nasdaq Stock Market, Direct Edge and BATS exchanges next week.
The Russell 1000 is composed of stocks of corporations with great market value. The weighted average market capitalization of its members is $69.8 billion. Its 10 top holdings are Exxon Mobil, Apple, Microsoft, Proctor & Gamble, General Electric, IBM, JP Morgan Chase, Johnson & Johnson, AT&T and Chevron.
The exchange-traded funds subject to the circuit breaker are widely held, including BlackRock iShares, Invesco PowerShares, State Street Global Advisor SPDR and Vanguard funds.
In the SEC's regime, trading in a security included in the program is paused for a five-minute period if the security experiences a 10 percent price change over the preceding five minutes.
The pause gives the markets an opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion.
The circuit breaker pilot program was approved in June in response to the market disruption of May 6 and currently applies to stocks listed in the S&P 500 Index. The circuit breaker program is in effect on a pilot basis through Dec. 10, 2010.
"These circuit breakers and this more objective guidance on breaking erroneous trades will help our markets retain the confidence of investors and companies," said SEC Chairman Mary L. Schapiro.
The erroneous trade rules include:
- For stocks priced $25 or less, trades will be broken if the trades are at least 10 percent away from the circuit breaker trigger price.
- For stocks priced more than $25 to $50, trades will be broken if they are 5 percent away from the circuit breaker trigger price.
- For stocks priced more than $50, the trades will be broken if they are 3 percent away from the circuit breaker trigger price.
- Where circuit breakers are not applicable, the exchanges and FINRA will break trades at specified levels for events involving multiple stocks depending on how many stocks are involved:
- For events involving between five and 20 stocks, trades will be broken that are at least 10 percent away from the "reference price," typically the last sale before pricing was disrupted.
- For events involving more than 20 stocks, trades will be broken that are at least 30 percent away from the reference price.
As with the circuit breaker program, these rules will be in effect on a pilot basis through Dec. 10, 2010.
The SEC said it also will consider whether different "market makers" should be required to adhere to specific rules to keep markets fair and orderly, when technical or other disruptions occur and whether "stub" quotes that take effect only when prices fall precipitously should be outlawed.
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