Alert June 15, 2010

SEC Approves Stock-by-Stock Circuit Breaker Rules

The SEC issued an order approving rule proposals by U.S. securities exchanges and an order approving a rule proposal by FINRA that would establish a pilot program under which trading in any stock in the S&P 500® Index would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10% change in price over the preceding five minutes.  The SEC indicated in its announcement regarding the approvals that the exchanges and FINRA were expected to begin implementing the new rules as early as June 11.  The pilot will continue through December 10, 2010.  The SEC also indicated that it anticipated the exchanges and FINRA would file additional rule proposals in the near future to expand the scope of the pilot (for example, to include ETFs) within the pilot period.  At the  request of SEC Chairman Mary Schapiro, the SEC staff also will:

  • consider ways to address the risks of market orders and their potential to contribute to sudden price moves.
  • consider steps to deter or prohibit the use by market makers of “stub” quotes, which are not intended to indicate actual trading interest.
  • study the impact of other trading protocols at the exchanges, including the use of trading pauses and self-help rules.
  • continue to work with the exchanges and FINRA to improve the process for breaking erroneous trades, by assuring speed and consistency across markets.

The SEC staff will also consider whether to recalibrate the existing market‑wide circuit breakers for equity trading venues and futures markets, which were not triggered on May 6.