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SEC Expands Coverage of Stock-by-Stock Circuit Breaker Rules

On September 10, 2010, the Securities and Exchange Commission approved new rules submitted by the national securities exchanges and FINRA to expand a recently-adopted circuit breaker program to include all stocks in the Russell 1000 Index and certain exchange-traded funds.  Also approved were stock exchange and FINRA rules laying out the process for breaking erroneous trades.  Under the circuit breaker pilot program rules adopted in June:

trading in a stock would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. The pause would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion. Initially, these new rules would be in effect on a pilot basis through Dec. 10, 2010. The markets will use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breaker as warranted based on their experience, and to expand the scope to securities beyond the S&P 500 (including ETFs) as soon as practicable.

The pilot program will run until December 10, 2010.  For stocks traded under the program, trades will be broken at specified levels depending on the stock price:

  • 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.

In addition to the circuit breaker rules, according to the Commission, Chairman Schapiro has asked the SEC staff to look into

  • Considering whether market makers should be subject to more meaningful obligations to promote fair and orderly markets.
  • Working with the exchanges to prohibit the use by market makers of "stub" quotes that are not intended to indicate actual trading interest.
  • Studying the impact of multiple trading protocols at the exchanges, including the use of trading pauses and self-help rules.

The SEC is also working with the CFTC to determine whether market-wide circuit breaker triggers already on the books should be recalibrated for all equity trading venues and the futures markets.

The full text of the SEC's announcement is available at:  http://www.sec.gov/news/press/2010/2010-167.htm