SEC Seeks to Tighten Circuit Breaker Rules

The new market-wide rules would replace those adopted in October 1988 to avoid 'flash crashes'

Furthering its efforts to avoid another “flash crash” like the one that occurred last May, the Securities and Exchange Commission on Tuesday announced that the national securities exchanges and the Financial Industry Regulatory Authority are filing proposals to revise existing market-wide circuit breakers that are designed to address extraordinary volatility across the securities markets.

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

The proposals update the market-wide circuit breakers by taking measures like reducing the market decline percentage thresholds necessary to trigger a circuit breaker, shortening the duration of the resulting trading halts, and changing the reference index used to measure a market decline.

“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, in a statement the same day. “We look forward to reviewing the comments, including any views on how the proposed circuit breaker changes might work together with the proposed limit up-limit down mechanism for individual securities.”

The proposed rule changes are out for a 21-day public comment period.

If approved by the commission, the new rules would replace the existing market-wide circuit breakers, which were originally adopted in October 1988 and have only been triggered on one day in 1997, according to the SEC.

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% to 7, 13, and 20% 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.
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