SEC Updates Market Circuit Breaker Proposals
Monday, October 03, 2011

The Securities and Exchange Commission (SEC) has announced that several United States stock exchanges and the Financial Industry Regulatory Authority (FINRA) are to file proposals to revise existing market-wide circuit breakers that are designed to operate when there is extraordinary volatility across the securities markets.

When triggered, the market-wide circuit breakers halt trading in all exchange-listed securities throughout the US markets. If approved by the SEC, the new 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.

The market-wide circuit breakers were not triggered during the severe market disruption of May 6, 2010, the so-called 'Flash Crash,' when there was an extreme movement in the prices of many US-based equity products that experienced an extraordinarily rapid decline and recovery, and which led the stock exchanges and FINRA, in consultation with the SEC, to assess whether the circuit breakers needed to be modified or updated in light of current market structures.

When triggered, the circuit breakers halt trading in all exchange-listed securities throughout the US markets. The proposals being filed would update them 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. The new rules would use the broader S&P 500 Index as the pricing reference to measure a market decline, rather than the Dow Jones Industrial Average.

Comments are being sought on the proposed rule changes, which are subject to final SEC approval following a 21-day public comment period.

“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.”