The SEC, national securities exchanges and Financial Industry Regulatory Authority (FINRA) recently proposed changes to certain rules governing the process for breaking erroneous trades and the addition of the stocks in the Russell 1000 Index and certain ETFs to the circuit breaker rules to further address extreme market volatility, such as that which occurred on May 6, 2010.
The first proposal sets forth uniform standards for breaking clearly erroneous trades, which are in contrast to the current standards that allow the exchanges discretion to select a different percentage threshold at which they would break trades. Under the proposed rules, where stocks are subject to the new single stock circuit breakers, trades would be broken: 1) for stocks priced $25 or less, if the trades are at least 10 percent away from the circuit breaker trigger price; 2) for stocks priced between $25 and $50, if they are 5 percent away from the circuit breaker trigger price; and 3) for stocks priced more than $50, if they are 3 percent away from the circuit breaker trigger price. Where circuit breakers are not yet applicable, trades would be broken: 1) for events involving between 5 and 20 stocks whose executions occurred within a period of 5 minutes or less, if the trades are at least 10 percent away from the reference price; and 2) for events involving more than 20 stocks whose executions occurred within a period of 5 minutes or less, if they are at least 30 percent away from the reference price. The rules are proposed to be in effect on a pilot basis through December 10, 2010.
The second proposal expands the new circuit breaker program (discussed in our June 2010 Investment Management Developments) to include all stocks in the Russell 1000 Index and certain exchange traded funds. Trading in a security in the circuit breaker program is paused for a five-minute period if the security experiences a 10 percent price change over the preceding five minutes. Copies of the SEC press releases regarding these proposals are available at: http://www.sec.gov/news/press/2010/2010-104.htm and http://www.sec.gov/news/press/2010/2010-117.htm.