WASHINGTON – Top regulators and stock exchange officials on Tuesday proposed the creation of a unified circuit-breaker system for all exchanges to halt or slow down trades of a particular stock if the price moves 10 percent or more in a five-minute period.

The proposal, which would be marketwide and be set up as a pilot program that runs through Dec. 10, comes in the wake of the Dow Jones industrial average’s sudden drop of nearly 1,000 points on May 6 before swiftly recovering to end at a 348-point loss. At one point that afternoon, the Dow dropped 481 points in six minutes and then had recovered 502 points just 10 minutes later.

“We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges,” Securities and Exchange Commission Chairwoman Mary Schapiro said. “I believe it is important that all the exchanges quickly reached consensus on a set of uniform circuit breakers that would be triggered when needed.”

The proposal would be subject to a 10-day comment period. Exchanges would need to have their circuit breakers operational by mid-June, according to people familiar with the SEC proposal.

“The pause would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price and resume trading in a fair and orderly fashion,” Schapiro said.

Currently, equity exchanges have inconsistent circuit-breaker policies with respect to individual stocks that experience major price moves. So even if trading in a particular stock is halted for less than a second on one exchange, known as a pause, it isn’t halted on other electronic exchanges.

Advertisement

Based on the proposal, exchanges would need to write stock-specific, circuit-breaker listing standards and have them approved by the SEC.

The agency still plans to release a report examining the so-called “flash crash” as well as making recommendations, according to people familiar with the discussions.

Schapiro said the SEC staff is still working with exchanges about whether to “recalibrate” marketwide circuit breakers that already exist.

An existing unified, marketwide system of circuit breakers would halt exchanges in the event of a 10 percent drop in the Dow industrials — a plunge of 1,060 points, based on the current level of the blue-chip benchmark — before 2 p.m. Eastern time. With a 10 percent Dow market drop between 2 and 2:30 p.m., the exchanges would halt for half an hour, while any 10 percent drop after 2:30 p.m. would result in no halt.

Trading hours on the New York Stock Exchange are 9:30 a.m. to 4 p.m.

On May 6, the plunge came after 2:30 and didn’t result in a Dow drop of 1,050 points or more. As a result, no marketwide halt was triggered.

Agency staffers are discussing whether they would expand the existing circuit-breaker system into one that would have responded on May 6 by halting all exchange trading in the event of a 5 percent drop in the Dow industrials, according to people familiar with the talks.

 


Only subscribers are eligible to post comments. Please subscribe or login first for digital access. Here’s why.

Use the form below to reset your password. When you've submitted your account email, we will send an email with a reset code.