As we discussed yesterday, recent media reports suggested that the US Securities and Exchange Commission (SEC) was planning to announce proposals for new circuit breaker rules to address issues stemming from the market volatility of May 6. Such proposals were subsequently announced late yesterday afternoon.
Under the proposed rules, which reflect a consensus among the various U.S. stock exchanges and the Financial Industry Regulatory Authority (FINRA), trading in a stock would be paused for five minutes where the stock experienced a 10 percent change in price over a five minute period. The five minute pause would be intended to "give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price and resume trading in a fair and orderly fashion." If approved by the SEC after the comment period, the new rules would be in effect on a pilot basis through December 10, 2010, during which time SEC staff would study, among other things, the impact of other trading protocols.
The SEC and Commodity Futures Trading Commission (CFTC) also released their preliminary findings yesterday regarding the "unusual market events" of May 6. While the events of that day continue to be reviewed, the report focuses on the following "hypotheses and findings": (i) the possible linkage between the decline in the prices of stock index products and the simultaneous and subsequent waves of selling in individual securities; (ii) a generalized severe mismatch in liquidity; (iii) the extent to which the liquidity mismatch may have been exacerbated by disparate trading conventions among various exchanges; (iv) the need to examine the use of "stub quotes"; (v) the use of market orders, stop loss market orders and stop loss limit orders that, coupled with sharp price declines, might have contributed to market instability; and (vi) the impact on Exchange Traded Funds.