WASHINGTON (CN) – All trading on U.S. securities markets would be halted for 15 minutes if the markets decline more than 7 per cent from the prior day’s closing under revised market wide circuit-breaker procedures submitted to the Securities and Exchange Commission.
The revised procedures, proposed by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA), are intended to curb severe market volatility like the Flash Crash of May 6, 2010 when the Dow Jones Industrial Average dropped more than 600 points in 5 minutes only to regain most of the loss 20 minutes later.
Existing circuit-breakers – which are supposed to temporarily halt market trading if the value of the market drops by a certain percentage below the previous day’s closing – did not kick-in during the Flash Crash. The existing rules were adopted in 1988 and have only been triggered once in 1997 according the SEC.
The proposals reduce the market decline percentage thresholds necessary to trigger a circuit breaker from 10, 20, and 30 percent to 7, 13, and 20 percent from the prior day’s closing. The resulting halt on trades would only last 15 minutes.
The daily calculation of the trigger point would be a change from the current mechanism which sets the market decline threshold every quarter.
The broader S&P 500 index, composed of 500 large-cap stocks, would be used as the pricing reference to measure market decline rather than the Dow Jones Industrial Average which is composed of just 30 stocks.
In a related action the SEC will delay until November 28, 2011 ruling on a proposal by the security exchanges and FINRA to limit volatility in individual stocks. That proposal would halt trading in certain individual securities if the price moves 10 percent or more in a five-minute period.After the proposals are published in the Federal Register the public will have 21 days to comment.