SEC’s Schapiro: ‘Flash Crash’ Lessons, One Year Later

When that confidence declines, Schapiro added, the ramifications–in lost wealth and increased cost of capital–can be great.

The SEC’s response, launched in the immediate aftermath of the event, included the following:

all stocks in the Russell 1000 Index, to more than 300 ETFs and to other exchange traded products.

• The pilot circuit breaker program first applied to stocks listed in the S&P 500 last June has since been extended. It now applies to
   
• Last September, the Commission approved exchange and FINRA rules designed to bring order and transparency to the process of breaking "clearly erroneous" trades.
• In November, the Commission approved exchange rules that enhance the quotation standards for market makers and eliminate “stub quotes.” Executions against stub quotes represented a significant proportion of the trades that were executed at extreme prices on May 6th and subsequently broken.
• Also last November, the Commission adopted a new rule requiring broker-dealers with market access to put in place risk management controls and supervisory procedures on a pre-trade basis – effectively banning naked access.

Schapiro also detailed the SEC’s “Volatility Plan,” enacted in the wake of the crash, to enact changes moving forward:

• First, the proposed plan would expand the pilot circuit breaker program in two significant respects. It would extend circuit breaker protection to all U.S.-listed equities. And, it would apply circuit breakers during the opening and closing periods of the day, which currently are not covered by the pilot program.
• Second, it would add a “limit up-limit down” mechanism. This would address weaknesses in the pilot program that permit a single erroneous trade to trigger a full trading pause.
• Finally, the Volatility Plan proposes cutting in half the price parameters that would trigger a pause, from 10%to 5%. This would greatly reduce the scope for sudden price moves.

“The events of May 6 remind us that despite the enormous benefits and efficiencies of today’s markets, there are risks as well,” Schapiro concluded. “But these risks can be identified and addressed.”