SEC Proposes Cut in Threshold for Trading Halts
The U.S. Securities and Exchange Commission began an overhaul of rules adopted a quarter century ago to shut down the stock market and related futures trading during periods of volatility, proposing that curbs be triggered when the Standard & Poor’s 500 Index falls 7 percent.
The changes would switch the index used for circuit breakers to the S&P 500 from the Dow Jones Industrial Average, according to proposals submitted by U.S. equities exchanges and the Financial Industry Regulatory Authority. Index declines that set off halts in stocks, options and futures would be reduced and their duration shortened, according to a summary of the proposals from the SEC.
“Tighter circuit breakers and a coordinated effort will allow everyone to take a breath when it’s needed,” William Karsh, a consultant and former chief operating officer at Jersey City, New Jersey-based Direct Edge Holdings LLC, said in a phone interview. “If they stop trading and give people a chance to assess what’s going on, they can reopen without the crazy whipping action we saw on May 6, 2010.”
Regulators have been seeking ways to prevent market disruptions such as the May 6, 2010, plunge in which the Dow briefly dropped 9.2 percent in what came to be known as the flash crash. Rules adopted last year halt trading in many individual stocks when they swing more than 10 percent and mandate additional obligations for market makers.
S&P 500 declines of 7 percent, 13 percent and 20 percent from the prior day’s close would set off halts across all markets, narrowing the current thresholds of 10 percent, 20 percent and 30 percent in the Dow average, according to the SEC.
The proposed 7 percent circuit breakers would have been triggered 10 days since October 1987, according to data compiled by Bloomberg. Those dates include the May 6, 2010, rout and five days in October 2008, the month after Lehman Brothers Holdings Inc.’s collapsed, the data show.
Opting for the S&P 500 instead of the 30-member Dow will allow market volatility to be assessed against price changes in a broader range of securities, NYSE said in its proposal. Since the most actively traded options and futures on index products are also based on the broader benchmark, the switch will allow for a “better cross-market measure” of volatility, NYSE said.
The exchanges and Finra followed many of the recommendations by an advisory committee to the SEC and Commodity Futures Trading Commission, which said in February that marketwide halts should be permitted later in the day. The exchanges proposed allowing halts until 3:25 p.m. New York time, according to the NYSE document.
The exchanges will also calculate the threshold for halting trading daily instead of once each quarter, they told the SEC. This will ensure that trigger levels “relate to current market conditions, and are not compared to what may be stale market conditions,” NYSE said in its proposal. The trigger values will be published before trading begins each day, NYSE said.
Plunges after 9:30 a.m. and until 3:25 p.m. that set off the halts will pause trading for 15 minutes, NYSE’s proposal said. The exchanges would scrap the current system of halts of different durations based on what time the drop takes place. A 20 percent decline, whenever it occurs, would stop trading for the rest of the day.
“Recalculating the tripwire on a daily rather than quarterly basis is a no-brainer,” Mike Shea, managing partner at Direct Access Partners LLC, said in an e-mail. Allowing trading to be halted prior to only one point in time, 3:25 p.m., simplifies the process “without any sort of radical consequences.”
Reducing the trigger level and length of halts means less disruption to markets while preserving the ability to stop trading during “serious market declines,” NYSE said. NYSE said the tweaks will be better in “today’s markets, where trading information travels in micro-second speed.”
The marketwide circuit breaker has only been triggered once, on Oct. 27, 1997, NYSE said. The curbs at the time were based on declines in the Dow of 350 points and 550 points. They went off twice that day, first at 2:35 p.m. and then at 3:30 p.m. The second halted trading for the rest of the session.
The agency will review comments on how the suggested changes to the marketwide curbs will work with another proposal by the exchanges and Finra to alter circuit breakers for individual securities instituted after the May 6, 2010.
Comments may be submitted to the SEC for 21 days once the exchanges’ and Finra’s rule proposals are published in the Federal Register. The SEC must approve the rules for them to go into effect.
“Anything that increases consumer confidence in Wall Street and the market is positive,” Karsh said.
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