In the wake of the so-called “flash crash” on May 6, U.S. regulators are now formalizing the process for breaking erroneous trades.

The U.S. Securities and Exchange Commission announced on Thursday that the national securities exchanges in the U.S., and the Financial Industry Regulatory Authority, are filing proposed rules to clarify the process for breaking erroneous trades, to make it clearer when, and at what prices, trades will be broken.

Following the flash crash, the exchanges only broke trades that were more than 60% away from the last price before trading went haywire, in a process that was not transparent to the market. Under current rules, there is not a clearly defined standard used for breaking erroneous trades.

The new rules proposed Thursday would see trades in stocks that are subject to single stock circuit breakers broken at specified levels. Those new circuit breakers, which were also adopted in response to the crash on May 6, are triggered if a stock moves more than 10% in a five-minute period.

Under the proposed rules, for stocks priced $25 or less, trades would be broken if the trades are at least 10% away from the circuit breaker trigger price; for stocks priced between $25 and $50, trades would be broken if they are 5% away from the trigger price; and, stocks priced more than $50, the threshold is 3%.

For now, the single-stock circuit breakers only apply to stocks that are in the S&P 500 index. For stocks where these circuit breakers are not yet applicable, the exchanges and FINRA propose to break trades at specified levels for events involving multiple stocks depending on how many stocks are involved. For events involving between five and 20 stocks, trades would be broken that are at least 10% away from the reference price. Events involving more than 20 stocks would see trades broken when they are at least 30% away from the reference price.

“Establishing clear and transparent standards for breaking trades helps provide certainty in advance as to which trades will be broken, and allows market participants to better manage their risks,” said SEC chairman Mary Schapiro.

As with the single stock circuit breakers, the proposed rules on breaking trades also are proposed to be in effect on a pilot basis through Dec. 10.

Additionally, the SEC staff is considering ways to address the risks of stop loss and market orders and their potential to contribute to sudden price moves, considering steps to deter or prohibit the use by market makers of “stub” quotes, and studying the impact of disparate trading protocols at the exchanges. The regulator is also working with the markets and the Commodity Futures Trading Commission to re-calibrate market-wide circuit breakers.

IE