Today, the SEC announced that it had approved the previously published proposals by the national securities exchanges and FINRA to expand the circuit breaker rules to all stocks in the Russell 1000 Index and certain exchange-funds.
The circuit breaker rule was originally approved in June for application to stocks in the S&P 500 Index. Under the circuit breaker rule, trading in a security is paused for a five-minute period if the security experiences a 10 percent price change over the preceding five minutes.
In addition to the expansion, the SEC also approved new FINRA rules designed to provide objective guidance for striking erroneous trades:
For stocks that are subject to the circuit breaker program, trades will be broken at specified levels depending on the stock price:
- Stocks priced $25 or less - trades will be broken if the trades are at least 10% away from the circuit breaker trigger price.
- Stocks priced more than $25 to $50 - trades will be broken if they are 5% away from the circuit breaker trigger price.
- Stocks priced more than $50 - trades will be broken if they are 3% away from the circuit breaker trigger price.
Where circuit breakers are not applicable, trades will be broken at specified levels for events involving multiple stocks depending on how many stocks are involved:
- Events involving between five and 20 stocks - trades will be broken that are at least 10% away from the “reference price,” typically the last sale price before pricing was disrupted.
- Events involving more than 20 stocks - trades will be broken that are at least 30% away from the reference price.
These new rules were designed in response to the disruption of May 6, and will be in effect on a pilot basis through Dec. 10, 2010.
As the SEC continues to consider policy responses to the May 6 "flash crash," Senator Charles Schumer (D-NY) sent a letter earlier this week to Chairman of the SEC Mary Schapiro urging the SEC to consider adopting new rules to “slow down” high-frequency trading during periods of high market volatility, and proposed curbs on particular techniques. Senator Schumer also suggested that the SEC adopt restrictions on certain techniques such as such as “quote stuffing” and sub-penny pricing.