July 11, 2013
The Securities and Exchange Commission (SEC) recently implemented a new plan to address extraordinary market volatility among individual exchange-listed securities in the U.S. equity markets. The SEC also approved updates to the existing market-wide circuit breaker rule that are intended to enhance the rule’s effectiveness.
Limit Up—Limit Down Plan
The Limit Up—Limit Down plan is designed to prevent trades in National Market System (NMS) securities from occurring outside specified price bands set at a percentage above and below the average price of the security during the immediately preceding five-minute period. The new plan will replace the single-stock circuit breaker program, which was instituted as a pilot following the May 6, 2010, Flash Crash to supplement the market-wide circuit breaker rule (below). The Limit Up—Limit Down pilot launched with a limited number of securities on April 8, 2013. More securities will gradually be added to the plan until the full rollout is complete, which is expected to occur by September 30, 2013.
Market-Wide Circuit Breaker Updates
The SEC has also implemented several updates to the market-wide circuit breaker rule, which applies a halt in trading on all U.S. exchanges if the market experiences extraordinary volatility. The S&P® 500 will replace the Dow Jones Industrial Average index (of 30 stocks), for a broader, cross-market measure of market volatility. In addition, the SEC reduced the halt time to minimize market disruption, and lowered the percentage of decline at which a halt is triggered.
For more information, visit sec.gov.