SEC Expands Circuit Breakers to Russell 1000 Stocks
Mary Schapiro, chairman of the U.S. SEC
Jin Lee/Bloomberg
Mary Schapiro, chairman of the U.S. Securities and Exchange Commission.
Mary Schapiro, chairman of the U.S. Securities and Exchange Commission. Photographer: Jin Lee/Bloomberg
The Securities and Exchange Commission doubled the scope of stock trading curbs to include all companies in the Russell 1000 Index, expanding a program meant to help prevent another plunge like the May 6 rout.
The announcement, which also extends coverage to 344 exchange-traded funds, was made in a statement on the regulator’s website. The volatility curbs put in place in June applied only to Standard & Poor’s 500 Index stocks. The Russell 1000 tracks shares of the biggest U.S. companies.
The pilot program, which is scheduled to last through Dec. 10, was implemented by U.S. exchanges and the Financial Industry Regulatory Authority after the May 6 stock market crash that erased $862 billion in less than 20 minutes. The curb halts a company for five minutes after it rises or falls at least 10 percent within five minutes.
“The pause gives the markets an opportunity to attract new trading interest in an affected stock, establish a reasonable market price and resume trading in a fair and orderly fashion,” the SEC’s notice said. The agency is working to alter the program to avoid problems that have emerged with the current circuit breakers, which have sometimes been triggered by a single transaction or trades that were later deemed erroneous.
‘Anomalous Trades’
“The existing circuit breakers for individual equities were an essential first step -- but I believe they can be improved,” SEC Chairman Mary Schapiro said in a speech in New York on Sept. 7. “Our next steps are likely to include a careful review of a limit up/limit down procedure that would directly prevent trades outside specified parameters, while allowing trading to continue within those parameters.” That would prevent “many anomalous trades” from occurring, she said.
Limits on how far a stock price can move in five minutes could stop trading when information emerges that “may warrant a significant move in price,” Schapiro said. She added that the SEC will work to develop “an improved circuit breaker mechanism that secures the advantages of both limit up/limit down and trading pauses.”
Seven stocks have been halted by the volatility circuit breaker: Intel Corp. on Aug. 27, Micron Technology Inc. on Aug. 5, Cisco Systems Inc. on July 29, Genzyme Corp. on July 23, Anadarko Petroleum Corp. on July 6, Citigroup Inc. on June 29 and Washington Post Co. on June 16. The Intel move was triggered by the Santa Clara, California-based semiconductor maker cutting its sales forecast. Genzyme was lifted by takeover speculation.
S&P 500 ETF
The SEC said ETFs covered by the circuit breakers include the SPDR S&P 500 ETF Trust, iShares Russell 2000 Index Fund, PowerShares QQQ, iShares MSCI Emerging Markets Index, iShares MSCI EAFE Index Fund and SPDR Gold Trust.
The regulator also approved rules from the exchanges and Finra about when and at what price they will cancel trades. Like the circuit breakers, the rules will be in effect until Dec. 10.
During the May 6 drop, almost 20,800 trades that were at least 60 percent away from the market price when the plunge began were later canceled. Exchange-traded funds accounted for 70 percent of the securities with trades that were voided later that day.
For stocks up to $25, trades will be canceled if they’re at least 10 percent away from the circuit breaker trigger price. Trades 5 percent away will be voided for stocks up to $50. Higher-priced shares will be broken if they’re 3 percent away from the curb’s trigger level.
Market Event
Securities not in the expanded circuit breaker program will be canceled according to new rules when they’re part of an “event” involving at least five stocks. Cancellations will occur when those stocks move more than 10 percent or 30 percent away from a “reference price,” based on the number of securities involved. The reference price will usually be the last sale before pricing was disrupted, the SEC said.
Regulators and exchanges plan to address other trading issues that emerged as potential problems on May 6. The SEC is considering whether market makers should face new obligations to promote fair and orderly markets, the agency said. Stub quotes, which are bids or offers far away from a stock’s price used by market makers to meet a regulatory quoting obligation, are also slated for elimination.
The SEC and Commodity Futures Trading Commission are working with securities and derivatives exchanges to adjust the circuit breakers that halt all trading across markets when the Dow Jones Industrial Average moves at least 10 percent.
To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net.
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