SEC Modifies 'Flash Crash' Circuit Breaker Rules

The US Securities and Exchange Commission (SEC) has announced two updated initiatives, and corresponding mechanisms, referring to the Flash Crash of May 6, 2010, replacing those initially approved on a pilot basis following the events of that day.

The first establishes parameters around a limit-up–limit-down mechanism preventing trades on individual exchange-listed stocks from occurring outside particular price bands that correspond to preset percentage changes occurring over the previous five minutes. Securities on the S&P 500, Russell 1000 Index, and other certain liquid exchange-traded products will have a level of 5 percent; remaining securities will be limited at 10 percent. Those percentages will double during opening and closing.

The five-minute trading pause included within current circuit breakers will remain to accommodate more fundamental price moves.

Meanwhile, the second initiative addresses market-wide circuit breakers, which had been in place since October 1988, but proved insufficient to trigger a halt to trading during the 2010 Flash Crash.

The new rules will reduce the decline percentage threshold triggers to 7, 13, and 20 percent from the prior day's closing, replacing 10, 20, or 30 percent, for initiating a halt in trading. It will also shorten the duration of those halts in trading not causing a close in market to 15 minutes, from 30, 60, or 120 minutes; simplify relevant trigger time periods down to two—before and after 3:25 p.m.; designate the S&P 500 rather than Dow Jones Industrial Average for pricing references; and mandate daily, rather than quarterly, recalculation of trigger thresholds.

Under the new plan all exchanges, automated trading venues, and broker-dealers executing trades internally will work in concert with the Financial Industry Regulatory Authority (Finra) to establish policies and procedures to comply with the procedures set forth in the plan, with an implementation deadline of February 4, 2013.

"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. In today's complex electronic markets, we need an automated and appropriately calibrated way to pause or limit trading if prices move too far, too fast," says SEC chair Mary L. Schapiro.