The Securities and Exchange Commission (SEC) approved stock circuit-breaker rules on Thursday, June 10, that require a pause in the trading of individual stocks if the price moves 10% or more in a five-minute period.
The rules, which the exchanges and the Financial Industry Regulatory Authority (FINRA) will begin implementing as early as June 11, come in response to the market disruption of May 6. On that day, an unusual glitch in trading led to a “flash crash” that saw the Dow Jones industrial average plunge by nearly 1,000 points in a matter of minutes. The market also recovered in a matter of minutes, but the episode left investors worried about the safety and soundness of equity trading markets.
The pause applies to stocks in the Standard & Poor’s 500-stock index, according to the SEC’s June 10 release.
Under the rules, 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 May 6 market disruption illustrated a sudden, but temporary, breakdown in the market’s price setting function when a number of stocks and ETFs were executed at clearly irrational prices,” said SEC Chairman Mary Schapiro in a statement. “By establishing a set of circuit breakers that uniformly pauses trading in a given security across all venues, these new rules will ensure that all markets pause simultaneously and provide time for buyers and sellers to trade at rational prices.”