One initiative, Release No. 34-67091, establishes a limit up-limit down mechanism that prevents trades in individual exchange-listed stocks from occurring outside of a specified price band. When implemented, this new mechanism will replace the existing single-stock circuit breakers that the Commission approved on a pilot basis after the market events of May 6, 2010. The second initiative, Release No. 34-67090, updates existing market-wide circuit breakers that, when triggered, halt trading in all exchange listed securities throughout US markets. The changes lower the percentage-decline threshold for triggering a market-wide trading halt and shorten the amount of time that trading is halted.
The initiatives are the product of a significant effort to devise a sophisticated, yet workable and effective way to protect markets from excessive volatility, said SEC Chair Mary Schapiro. In today’s complex electronic markets, she said, the SEC needs an automated and appropriately calibrated way to pause or limit trading if prices move too far too fast. The Commission, along with the exchanges and FINRA, will be closely monitoring the operation of the new limit up-limit down and market-wide circuit breaker processes during the pilot period to make sure any rules approved on a permanent basis are as effective as they can be.
The limit up-limit down mechanism, established jointly by the exchanges and FINRA, prevents trades in individual listed equity securities from occurring outside of a specified price band, which would be set at a percentage level above and below the average price of the security over the immediately preceding five-minute period. For more liquid securities and certain exchange-traded products the level will be 5 percent, and for other listed securities the level will be 10 percent. The percentages will be doubled during the opening and closing periods and broader price bands will apply to securities priced $3 per share or less.