As reported by Bloomberg (click here for story), the U.S. Securities and Exchange Commission has begun an overhaul of decades-old rules adopted to close the stock market and related futures trading during periods of volatility. New proposals by U.S. equities exchanges and the Financial Industry Regulatory Authority call for halts across markets to be implemented when the Standard & Poor’s 500 Index falls by certain percentage increments: seven percent (7%), thirteen percent (13%), and twenty percent (20%) from the prior day’s close. This approach is a switch away from drops of ten percent (10%), twenty percent (20%), and thirty percent (30%) in the Dow Jones Industrial Average, the index that had been used previously, according to the SEC. The lesser two triggers would initiate a fifteen minute trading halt, whereas the twenty percent trigger would stop trading for the rest of the day. Trigger values would be calculated daily (a change from quarterly) and published before the commencement of trading. The proposals were based on recommendations by an advisory committee to the SEC and the Commodity Futures Trading Commission.
For perspective, Bloomberg compiled data indicating that the new trigger would have been tripped on just ten trading days since 1987, including the “flash crash” on May 6, 2010, and five days in October 2008 following the collapse of Lehman Brothers.
The SEC is accepting comments for 21 days once the proposals are published in the Federal Register. The SEC’s review will consider the interplay of these changes with a separate proposal by the exchanges and FINRA to alter circuit breakers for individual securities.
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