U.S. seeks new rules to halt trading

In a move aimed at keeping panic selling from scuttling markets, the Securities and Exchange Commission announced proposal filing by the national securities exchanges and the Financial Industry Regulatory Authority to revise rules determining when stock market circuit breakers are triggered.

Circuit breakers are designed to deal with extreme volatility in securities markets and halt trading when tripped.

The move comes largely in response to a failure by existing market circuit breakers to trip during the May 6, 2010 flash crash. That failure suggests existing safeguards are not adequately tailored to “today’s market structure,” explains the SEC release.

The SEC is seeking comment on the proposed changes, which modify the current circuit breaker rules in five key ways:

First, market decline percentages necessary to trigger a circuit breaker will be cut from 10%, 20%, and 30% to 7%, 13%, and 20% from the prior day’s closing price. “As demonstrated by the May 6, 2010 flash crash, the SROs believe that the current Level 1 10% decline may be too high a threshold before determining whether to halt trading across all securities,” the proposal paper says.

Second, the new rules would shorten the duration of resulting trading halts that don’t close that day’s market from 30, 60, or 120 minutes to 15 minutes.

Third, the proposals would simplify circuit breaker structures by reducing trigger periods from six to two — those occurring before 3:25 p.m. and those occurring on or after 3:25 p.m.

Fourth, the broader S&P 500 Index would be used as the pricing reference to measure a market decline, rather than the Dow Jones Industrial Average. “FINRA believes that because the S&P 500 is based on the trading prices of 500 stocks, it represents a broader base of securities against which to measure whether extraordinary market-wide volatility is occurring,” the paper says.

Fifth, new trigger thresholds would be recalculated daily rather than quarterly.