The Financial Industry Regulatory Authority (FINRA) and national securities exchanges on Wednesday filed a proposal with the Securities and Exchange Commission to establish a new “limit up-limit down” mechanism to address extraordinary market volatility in U.S. equity markets, the SEC announced.
Under the proposal, which is subject to SEC approval, trades in listed stocks would have to be executed within a range tied to recent prices for that security, according to an SEC news release. The new limit up-limit down mechanism would replace the existing single stock circuit breakers, which the SEC approved on a pilot basis shortly after the “flash crash” of May 6, 2010.
The exchanges and FINRA have requested that the SEC approve the limit up-limit down plan as a one-year pilot program.
Following a 21-day public comment period, the SEC will vote on whether to approve the proposal. While the circuit-breaker pilot acted as a stopgap measure to slow down electronic trades immediately after the flash crash, SEC Chairman Mary Schapiro (left) is now in favor of instituting a broader and better-developed mechanism.
What Your Peers Are Reading
“Upgrading our trading parameters will help our markets retain the confidence of investors and companies,” Schapiro said in a statement. “We were focused on improving the structure of our markets before weaknesses were exposed on May 6, and we will continue to be focused on market structure going forward.”
On May 6 in the course of just 20 minutes, the Dow Jones industrial average plunged about 700 points then bounced back up again. A November report from the SEC and Commodity Futures Trading Commission found that the giant tumble was triggered by a single, $4.1 billion computer-initiated trade by a Kansas-based Waddell & Reed mutual fund that involved the sale of E-mini futures contracts.