U.S. securities regulators are adopting new measures to combat extraordinary stock market volatility.
The U.S. Securities and Exchange Commission (SEC) Friday approved two proposals submitted by the national securities exchanges and the industry self-regulatory organization, the Financial Industry Regulatory Authority (FINRA), that are designed to address extraordinary volatility in individual securities and the broader stock market.
The initiatives include a ‘limit up-limit down’ mechanism that prevents trades in individual exchange-listed stocks from occurring outside of a specified price band; and, and update to the existing market-wide circuit breakers, lowering the threshold for triggering the circuit breakers, and shortening the resulting trading halts.
The new limit up-limit down mechanism will replace the existing single-stock circuit breakers that were introduced in response to the flash crash of May 2010, when markets suddenly plunged sharply before quickly recovering. The changes to the market-wide circuit breakers also aim to address the volatility that was witnessed that day.
Canadian regulators are also considering changes to the existing market circuit breakers in Canada. Earlier this year, they adopted single-stock circuit breakers; and, the Investment Industry Regulatory Organization of Canada also recently initiated a consultation on new market thresholds to prevent so-called “fat finger” orders from reaching the market.
In the US, both proposals have been approved for a one-year pilot period, during which the exchanges, FINRA, and the SEC will assess their operation, and consider whether any modifications are appropriate. The changes are to be implemented by February 4, 2013.
The SEC notes that its staff is also considering whether additional measures may be needed, including establishing a consolidated audit trail system to better track orders and trades in securities across the national market system.
“The initiatives we approved are the product of a significant effort to devise a sophisticated, yet workable and effective way to protect our markets from excessive volatility,” said SEC chairman, Mary Schapiro. “In today’s complex electronic markets, we need an automated and appropriately calibrated way to pause or limit trading if prices move too far too fast.”
“The commission, along with the exchanges and FINRA, will be closely monitoring the operation of the new limit up-limit down and market-wide circuit breaker processes during the pilot period to make sure any rules approved on a permanent basis are as effective as they can be,” she added.