UPDATE:SEC Signs Off On Stock Market 'Circuit Breakers'
10 Giugno 2010 - 7:29PM
Dow Jones News
Trading exchanges as early as Friday will implement rules
designed to tame the volatility of individual stocks by temporarily
halting trading during dramatic price changes, even as market
participants are bracing for stiffer rules.
Members of the U.S. Securities and Exchange Commission signed
off on the stock market "circuit breaker" Thursday, the agency
said.
The New York Stock Exchange said it will begin a phased rollout
Friday. BATS Global Markets and Direct Edge also have said they
expect to begin implementation Friday.
The rule will be in effect on a pilot basis for six months.
The cross-market trading pause was proposed last month in
response to the May 6 "flash crash" that saw the Dow Jones
Industrial Average plummet almost 1,000 points before partially
recovering.
All exchanges will halt trading for five minutes in an
individual stock when its price moves 10% or more, up or down, in
the previous five minutes. The pause is designed to give traders
time to catch their breath and assess whether a stock's price
change stems from a real shift in value or an unrelated market
hiccup.
"These new rules will ensure that all markets pause
simultaneously and provide time for buyers and sellers to trade at
rational prices," said SEC Chairman Mary Schapiro.
The SEC considers the stock-by-stock circuit breaker rule to be
the first step of several to curb damage caused by unusual market
fluctuations like those seen on May 6. Regulators haven't
pinpointed a single cause for the incident and are saying it was
caused by a confluence of events.
The financial industry generally supports the circuit breaker,
but most observers and regulators agree that it alone won't stop
another flash crash from occurring.
Right now, the circuit breaker applies only to stocks contained
in the S&P 500 index. It doesn't cover smaller cap stocks or
index-based products such as exchange-traded funds, which were some
of the stocks most dramatically affected on May 6. "It is my hope
to rapidly expand the program to thousands of additional publicly
traded companies," Schapiro said.
"I am concerned that by limiting the rules to the issuers in the
S&P 500, other issuers will be vulnerable to continued market
volatility," said Rep. Melissa Bean (D., Ill.) in a letter to the
SEC.
The Issuer Advisory Group suggested that regulators include an
"opt-in" provision that would permit non-S&P 500 companies to
elect to participate.
Other people commenting about the rule are concerned about the
market disruptions outside of the 9:45 a.m. to 3:45 p.m. EDT
(1345-1945 GMT) window when the circuit breaker would be in effect.
TD Ameritrade Inc. (AMTD) said 10% to 15% of its trades on any
given day are placed overnight to be executed at market open,
leaving those stocks vulnerable for 15 minutes.
As a next step, the SEC is looking to ban "stub quotes," which
are placeholder prices that tend to be far from an actual market
price. Normally, those trades won't get executed. But investigators
believe that on May 6 some trades were executed unintentionally at
stub-quote prices.
The SEC also is working with exchanges to create a unified and
predictable policy for breaking erroneous trades.
Regulators and exchanges alike have said they are dissatisfied
with the decision to cancel hundreds of trades that occurred during
the height of market volatility on May 6. After the flash crash,
the exchanges decided to cancel all trades executed at prices that
were more than 60% above or below those printed before 2:40 p.m.
EDT (1840 GMT).
The SEC is eyeing certain types of buy and sell orders for
further regulation. Schapiro has identified two of these types:
market orders (orders to buy or sell at market price without regard
to fluctuations) and stop-loss orders (orders to sell when a stock
falls to a certain price). Investigators of the flash crash believe
those types of orders could have accelerated the market drop.
Regulators also will be keeping an eye on different exchanges'
rules to curb market volatility. NYSE Euronext (NYX) has a protocol
that halts trading in various stocks under certain circumstances.
Nasdaq OMX Group Inc. (NDAQ) last week announced a similar system
that it says is designed to complement the stock-by-stock circuit
breaker rule.
Knight Capital Group Inc. (KCG) said in a letter to the SEC that
the NYSE and Nasdaq protocols, combined with SEC rules on market
pauses, "could all be triggered during volatile market periods,
creating a great deal of confusion and uncertainty."
The New York Stock Exchange will undergo a phased rollout of the
circuit breaker pilot program, with the circuit breakers for some
stocks in effect starting Friday and the remainder being added
early next week, according to Raymond Pellecchia Jr., vice
president of corporate communications at NYSE Euronext.
By Wednesday, the circuit breakers will be functioning for all
affected stocks, he said.
This weekend, NYSE will provide scripted halt messages during a
testing period that will allow member firms to ensure they receive
them properly. The exchange hosted a similar testing session last
weekend as well. Pellecchia said firms can participate in the
testing remotely, and so it won't necessarily require traders to be
on the floor on a weekend.
-By Fawn Johnson, Dow Jones Newswires; 202-862-9263;
fawn.johnson@dowjones.com (Donna Kardos Yeslavich and Jacob Bunge
contributed to this report.)
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