SEC Proposes New Trading Rules

SEC finally puts in the much needed circuit breaker rule to avoid such crazy spikes like the one we had few days back, where we lost 1000 points in matter of minutes.

U.S. stock exchanges would briefly halt trading of some stocks that have big prices swings under new trading rules aimed at avoiding market plunges and proposed Tuesday by federal regulators.

The rules would take effect in mid-June under a six-month pilot program agreed to by major U.S. exchanges and the Securities and Exchange Commission. The SEC announced them and put them forward for public comment, in a response to the stunning plunge of May 6.

Under the plan, trading of any Standard & Poor’s 500 stock that rises or falls 10 percent or more — within a five-minute span — would be halted for five minutes. These rules, known as “circuit breakers,” would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time. That’s almost the entire trading day.

Importantly, the new circuit breakers would apply to all U.S. exchanges. Most of the 50 or so U.S. exchanges regulate themselves and design their own tools for slowing or halting trading.

During the May 6 plunge, the New York Stock Exchange slowed trading according to its rules but the orders that couldn’t be executed migrated in a torrent to electronic exchanges, industry officials said.

The SEC would vote on formally approving the rules sometime after a 10-day comment period, unusually short for the agency’s rule-making and indicating the urgency of the issue. The changes are intended to prevent a recurrence of the epic dive in which the Dow Jones industrials lost nearly 1,000 points in less than a half-hour.

“We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges,” SEC Chairman Mary Schapiro said in a statement. “As such, I believe it is important that all the exchanges quickly reached consensus on a set of uniform circuit breakers that would be triggered when needed.”

Marketwide rules for circuit breakers for individual stocks “would help to limit significant volatility,” Schapiro said. “They would also increase market transparency, bolster investor protection and bring uniformity to decisions regarding trading halts” in specific stocks.

The markets can use the pilot period, which would end on Dec. 10, to make needed adjustments based on how the new rules work, and the scope of the rules could be expanded to stocks beyond the S&P 500 “as soon as practicable,” the SEC said.