Post Flash Crash rules would tighten limits on market volatility by recalibrating triggers on market circuit breakers.
Triggers for preventing stock market meltdowns would become more sensitive under new rules proposed yesterday by the U.S. Securities and Exchange Commission and the self-regulatory authority known as FINRA.
The agencies propose narrowing current limits on market volatility that trigger circuit breakers bringing markets to a halt. Current rules require the SEC to stop trading on the Dow Jones Industrial Average for one hour if the exchange drops by 10 percent before 2 p.m. and by 30 minutes if the decline takes place between 2 p.m. and 2:30 p.m.. A 20 percent decline occurring before 1 p.m. triggers a two-hour halt on trading, and a 30 percent decline, regardless of the time, closes the market for the day.
Proposed new rules would recalibrate the trigger to halt trading on smaller declines of 7 percent, 13 percent and 20 percent from the prior day’s closing prices, but would halve the length of the shutdown, excluding declines that caused the market to be closed. The proposal would also simplify the structure of the circuit breaks to create two trigger time periods, the intervals before and after 3:25 p.m.
“This new market-wide circuit breaker together with other post-Flash Crash measures is designed to reduce extraordinary volatility in our markets,” said Mary Schapiro, chair of the exchange commission, in a prepared statement. The agency is set to approve the changes following a 21-day posed changes comment period.
The new market-wide rules would replace existing circuit-breaker rules, which were originally adopted in October 1998 and only used once, during a day of extreme market volatility in 1997. The circuit breakers were not triggered during the severe market volatility of May 6, 2010, and the ensuing disruption caused regulators and the exchanges to review the rules governing market circuit breakers.
The May 6, 2010 Flash Crash saw the Dow Jones Industrial Average plunge about 1000 points, or 9 percent, then recover within minutes, creating the biggest one-day point decline in the history of the average. The incident led to a lengthy investigation by the SEC and the Commodity Futures Trading Commission, which concluded the event began with unusually turbulent trading and was exacerbated by fragmented and fragile market, an unusually high number of sales by large mutual funds and aggressive moves by high-frequency traders.
In addition to market-wide circuit breakers, the SEC has approved “pilot” rules allowing circuit breaker pauses for certain individual securities when their prices move 10 percent of more in a five-minute period.