SEC to Publish for Public Comment Updated Market-Wide Circuit Breaker Proposals to Address Extraordinary Market Volatility

The Securities and Exchange Commission has announced that the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) are filing proposals to revise existing market-wide circuit breakers that are designed to address extraordinary volatility across the securities markets.

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

The proposals being filed today would update the market-wide circuit breakers by among other things 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.

If approved by the Commission, the new market-wide circuit breaker 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.

“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. “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 SEC will seek comment on the proposed rule changes, which are subject to Commission approval following a 21-day public comment period.

Market-Wide Circuit Breaker Proposal

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 percent to 7, 13, and 20 percent 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.

The market-wide circuit breakers were not triggered during the severe market disruption of May 6, 2010, which led the exchanges and FINRA in consultation with SEC staff to assess whether the circuit breakers needed to be modified or updated in light of today’s market structure. In addition, the Joint CFTC-SEC Advisory Committee on Emerging

Regulatory Issues recommended in February 2011 that the SEC and CFTC review the current operation of the market-wide circuit breakers, and consider appropriate modifications.

Other Post-May 6 Actions

The SEC has undertaken other initiatives to respond to the events of May 6, including:

- Approving rules that require the exchanges and FINRA to pause trading in certain individual securities if the price moves 10 percent or more in a five-minute period. This pilot program applies to all exchange-listed stocks and exchange-traded products.

- Approving new exchange and FINRA rules clarifying up front how and when erroneous trades would be broken.

- Approving new rules of the exchanges and FINRA to strengthen the minimum quoting standards for market makers and effectively prohibit “stub quotes” in the U.S. equity markets.

The Commission also is considering a proposal by the exchanges and FINRA to establish a “limit up-limit down” mechanism to address extraordinary market volatility in individual securities.

In addition, the SEC has:

- Adopted a rule requiring broker-dealers to have risk controls in place before providing their customers with access to the market.

- Adopted a rule establishing a large trader reporting system to enhance the Commission’s ability to identify large market participants and more effectively collect information on their trading activity.

- Proposed a rule to establish a consolidated audit trail system to better track orders and trades in securities across the national market system.

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