SEC Approves "Limit Up-Limit Down" Proposal and Proposed Revisions to Market-wide Circuit Breakers

The SEC approved two proposals by the national securities exchanges and FINRA to address market volatility.

PLC Corporate & Securities

On May 31, 2012, the SEC approved two proposals from the national securities exchanges and FINRA designed to address extraordinary market volatility, such as the "flash crash" of May 6, 2010. The approved changes:

  • Create a "limit up-limit down" mechanism to replace the existing single-stock circuit breakers.

  • Update the market-wide circuit breaker rules.

The proposals are scheduled to be implemented by the exchanges and FINRA by February 4, 2013. Both proposals have been approved for a one-year pilot period during which their operation will be monitored and assessed by the exchanges, FINRA and the SEC. For more on the proposals, see the SEC's press release.


Limit Up-Limit Down

The limit up-limit down mechanism prevents trades in individual listed equity securities that are outside of a specified price band based on the average price of the security over the immediately preceding five-minute period. The price band would be set at a percentage level above and below this average price based on the type of security:

  • Liquid securities will have a percentage level of 5%. These include securities in the S&P 500 Index, Russell 1000 Index and certain exchange-traded products.

  • Other listed securities will have a percentage level of 10%.

  • Securities priced at $3 per share or less will have broader price bands.

The percentage levels will be doubled during the opening and closing periods. A five-minute trading pause is triggered if a security cannot be traded within its specified price band for over 15 seconds.

For more on the limit up-limit down mechanism plan, see the SEC's National Market System Plan Approval Order.


Market-wide Circuit Breakers

The revised market-wide circuit breaker rules update the existing market-wide circuit breakers that, when triggered, halt trading in all exchange-listed securities throughout the US markets. The existing market-wide circuit breakers were adopted in October 1988 and have been triggered only once, in 1997, and were not triggered during the May 6, 2010 flash crash.

The approved changes update the existing circuit breaker rules to:

  • Reduce the market decline percentage thresholds necessary to trigger the circuit breakers from 10%, 20% and 30% to 7%, 13% and 20% from the prior day's closing price.

  • Shorten the duration of the resulting trading halts that do not close the market for the day from 30, 60 or 120 minutes to 15 minutes.

  • Simplify the structure of the circuit breakers so that there are only two, rather than six, relevant trigger time periods.

  • Use the broader S&P 500 Index as the pricing reference to measure a market decline rather than the Dow Jones Industrial Average.

  • Provide that the trigger thresholds are to be recalculated daily rather than quarterly.

These revisions are part of a larger effort by the exchanges and FINRA to respond to concerns about volatility raised by the 2010 flash crash and the rise of high-frequency trading.

For more on the revised market-wide circuit breaker rules, see the SEC's Market-wide Circuit Breaker Approval Order.

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