The Securities and Exchange Commission is likely to revise its approach to circuit breakers on the nation’s equities exchanges, to include a “careful review” of price bands that limit how far up or down the price of a stock can move at any given time.
SEC Chairman Mary Schapiro told the Economic Club in New York Tuesday that market players “should reexamine the circuit breaker mechanisms that directly limit’’ the kind of volatility in prices that were seen on May 6, the day when the Flash Crash sent the level of the Dow Jones Industrial Average down hundreds of points and back up again, in a matter of minutes.
The re-examination should include “a careful review of a limit-up, limit-down procedure that would directly prevent trades outside specified parameters, while allowing trading to continue within those parameters,’’ Schapiro said. “Such a procedure could prevent many anomalous trades from ever occurring, as well as limiting the disruptive effect of those that do occur.”
On May 6, trades that moved 60% above or below their last “good” price were declared erroneous and canceled.
After the crash, which saw shares in Accenture famously trading at 1 cent during a 10-minute period, the SEC approved rules that would pause trading in certain individual stocks if the price moved 10% or more in a five-minute period.
Schapiro Tuesday said that sort of circuit breaker for individual stocks was an “essential first step.” But she said the SEC should re-evaluate whether 10% is the right amount of movement to cause a circuit break or whether all trading in a stock necessarily needs to stop, when an anomalous trade causes a pause.
“We need to consider what types of circuit breakers with what parameters — for all our highly interconnected capital markets — are required to provide price discovery and minimize artificial short-term market shocks,’’ she said.
Even if all circuit breakers are set with appropriate parameters, Schapiro said, they should be considered “fail safe mechanisms” not to replace ongoing means of reliably establishing prices.
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