The SEC approved two rule proposals made by the national securities exchanges and FINRA intended to address volatility in the stock market. These rules will make two significant changes to stock trading. The first change will establish a "limit up-limit down" plan that would temporarily prevent trading in a particular stock in the event of rapid price swings. The second change will lower the triggering thresholds and shorten the trading halts for existing market-wide trading halt circuit breakers.
The "limit up-limit down" plan will prevent trades in a particular stock from occurring outside of a specified price band. The price band for each stock would be set at a percentage level above and below the average price of the security over the immediately preceding 5-minute period. The price band for more liquid securities (those in the S&P 500 Index, Russell 1000 Index and certain-exchange-traded products) will be 5%. The price band for all other listed securities will be 10%. The foregoing percentages will be doubled during the market opening and closing periods to account for increased trading volatility during such periods. A 15-second window will be created for a stock to trade back within its price band before trading in the stock is halted.
Under the revised market-wide circuit breaker rules, the market-decline percentage thresholds required to trigger a market-wide trading halt will be lowered from 10%, 20% and 30% to 7%, 13% and 20%. The broader S&P 500 Index, rather than the Dow Jones Industrial Average, will be used as the pricing reference to gauge a market decline. The existing trading halt periods of 30, 60 and 120 minutes will all be reduced to 15 minutes, except for when there is a 20% decline in which case trading will be halted for the remainder of the day.
The new rules will go into effect on a one-year pilot basis on February 4, 2013.
Sec. Exch. Act Rel. Nos. 34-67090 & 34-67091 (May 31, 2012).