Market volatility has become a key concern for most investors. Find out what the exchanges and SEC can do to limit extreme ups and downs in stock markets.
Millionaire investors are growing more wary of U.S. stock markets and cite extreme market volatility as a key reason for their concern, according to Millionaire Corner research. Volatility is also a major concern for U.S. stock exchanges, but unlike retail investors, the exchanges can step in to limit extreme ups and downs in stock prices.
The exchanges can halt trading on a single stock experiencing rapid fluctuations in prices, according to the Financial Industry Regulatory Authority or FINRA, the agency overseeing the brokerage industry.
“The U.S. securities markets trade enormous volumes of stocks every day,” FINRA said in a statement. “Every once in a while, markets may experience events, referred to as extreme market volatility, during which prices become erratic.”
To protect investors, the exchanges have agreed to halt trading on a single stock and some exchange-traded products when they change rapidly over a short period of time. Price moves that trigger trading halts include a 10 percent rise or fall in stocks in the S&P 500 and the Russell 1000 indices over a five-minute period. The exchanges will also halt trading on other securities priced at $1 or higher that move up or down by 30 percent over five minutes, or less expensive stocks that change by 50 percent over a similar interval.
Rapid price fluctuations may signal a market distortion, according to FINRA, and the subsequent trading halt gives buyers and sellers time to evaluate the situation before acting. Halts are set to last for five minutes, but can be extended if necessary.
The U.S. Securities and Exchange Commission, the federal agency charged with ensuring fair and orderly markets, can also bring market-wide trading to a halt through the use of so-called “circuit breakers” designed to curb volatility, according to FINRA.
The circuit breakers were first triggered on October 27, 1997, when the DowJones Industrial Average fell by 350 points and the SEC stopped trading for 30 minutes. Current rules set circuit breaker triggers for 10 percent, 20 percent and 30 percent drops of the DJIA, based on the average closing value for the previous month, but the SEC will being phasing in new circuit breaker rules for controlling market volatility in February 2013.