The Securities and Exchange Commission (SEC) on Thursday approved two proposals submitted by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) that address failures that occurred during the “flash crash” on May 6, 2010.
One initiative establishes a “limit up-limit down” mechanism that prevents trades in individual exchange-listed stocks from occurring outside of a specified price band.
When implemented, the SEC says this new mechanism will replace the existing single-stock circuit breakers that the commission approved on a pilot basis after the flash crash, when the Dow Jones Industrial Average fell more than 600 points in about five minutes and then quickly rebounded.
The second initiative updates existing marketwide circuit breakers that when triggered, halt trading in all exchange-listed securities throughout the U.S. markets.
According to the SEC, the existing marketwide circuit breakers were adopted in October 1988 and have been triggered only once, in 1997. “The changes lower the percentage-decline threshold for triggering a marketwide trading halt and shorten the amount of time that trading is halted,” the SEC says.
The exchanges and FINRA will implement these changes by February 4, 2013. On Thursday, the commission approved both proposals for a one-year pilot period, during which the exchanges, FINRA, and the SEC will assess their operation and consider whether any modifications are appropriate.
“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,” said SEC chairwoman Mary Schapiro, in a statement. “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.”