SEC May Tighten Trigger for Trading Restrictions, Official Says
The U.S. Securities and Exchange Commission may alter curbs that limit trading after a stock or exchange-traded fund shows rapid price movements, said James Brigagliano, the SEC’s deputy director of trading and markets.
The agency “might want a tighter band” such as 3 percent or 5 percent instead of the current 10 percent in the next phase of the circuit-breaker program, Brigagliano said today at a Securities Industry and Financial Markets Association conference in New York. Trading in a given stock in the Standard & Poor’s 500 Index and Russell 1000 Index and more than 300 ETFs is now halted for five minutes when the affected security’s price moves at least 10 percent in the preceding five-minute period.
The SEC and exchanges are moving toward an alternative system of curbs that incorporates a so-called limit up and limit down mechanism to prevent executions above or below a trigger level instead of halting trading, unless that becomes necessary, Brigagliano said. Discussions are taking place about how trading would “exit limit up, limit down” and return to normal rules for executions, he said.
The May 6 crash that erased $862 billion in equity value in about 20 minutes prompted exchanges to implement circuit breakers to pause trading in more than 1,300 securities during periods of volatility. Other changes such as uniform policies for canceling trades and eliminating stub quotes, or bids and offers at prices far away from the stock’s last sale, have also been proposed or adopted.
Reference Price
The SEC may also reconsider the so-called reference price that triggers a halt, Brigagliano said. It might take into account the volume-weighted average price in the security, he said. The circuit-breaker program for individual securities, begun in June, is a pilot that runs until Dec. 10.
Brigagliano said in an interview that the pilot could be extended beyond December. The SEC would have to propose alterations to the program and wait for comments about the new rules before they could be implemented, he said. Implementation of a new program of curbs by the end of the year “would be doubtful,” he said.
The goal is to have as few pauses as possible, avoid halting trading when that makes sense and provide a “safety net” for stocks and ETFs, Brigagliano said at the conference.
The circuit breakers that operate across securities and futures markets, introduced after the 1987 crash, are also being re-evaluated, Brigagliano said. Regulators are assessing the “band and what they should be based on,” he said in the interview.
The current curb is based on the Dow Jones Industrial Average and halts all trading for an hour when the Dow drops 10 percent before 2:30 p.m. New York time. The level of the decline and time of day determine the response.
To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.
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