SEC offers plan to limit meltdowns

The plan includes circuit breakers to halt trading of a stock if it falls 10% in a 5-minute period.

By Charley Blaine May 18, 2010 6:39PM

The Securities and Exchange Commission late today proposed a trial of individual circuit breakers on all of the stocks in the Standard & Poor’s 500 Index ($INX).

 

The circuit breakers are designed to slow trading and allow markets and traders to respond more rationally to sharp downturns. 

The trial is in response to the May 6 market slump that saw the Dow Jones industrials ($INDU) lose hundreds of points in a matter of minutes and briefly show a loss of nearly 1,000 points.


The circuit breakers will pause trading in those stocks if the price moves by 10% or more in a five-minute period. The trial period will begin after a 10-day comment period and will last through Dec. 10, the commission said.

 

The SEC said it developed the plan with the national securities exchanges and the Financial Industry Regulatory Authority.

 

During the pilot period, the commission staff will also consider other measures discussed during a recent congressional inquiry into the "flash crash."

 

Those included ways to address the risks of market orders, a potential ban on stub quotes of one or a few cents for a stock that is trading significantly higher than that, and the use of trading pauses at various exchanges.

 

Ultimately, the SEC wants to include exchanged-traded funds in the plan, CNBC's Bob Pisani said.

 

Stock and stock-index futures prices were already declining on May 6 when, at about 2:42 p.m. ET, they suddenly plunged by more than 5% over the next five minutes.

 

When prices bottomed at about 2:47 p.m., the Dow was down nearly 990 points, 9.1% below where it had started the day.

 

Almost as quickly as prices dropped, however, they rebounded, with the Dow Jones industrials ($INDU) recovering 543 points in about 90 seconds. The Dow finished the day down 347.80, or 3.2%, at 10,520.

 

Some individual stocks fared far worse, particularly several exchange-traded funds, which are essentially mutual funds that trade like stocks. Five exchange-traded funds changed hands for one penny or less per share; another nine traded at 15 cents or less.

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