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SEC Announces Proposed Circuit Breaker Rules

In response to the May 6 “flash crash,” the SEC is publishing proposed circuit breaker rules to pause trading in certain stocks if the price moves 10 percent or more in a five minute period.

Working with the national securities exchanges and the Financial Industry Regulation Authority (FINRA), in consultation with SEC staff, the Commission is proposing the circuit breaker rules would apply to individual securities in the S&P 500 Index.

The SEC said it is currently seeking comments on the proposed rules, which are result from a consensus among exchanges, FINRA and the SEC. The rules would apply to all equity trading venues and futures markets.

In an SEC statement, Chairman Mary Schapiro said, “We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges. As such, I believe it is important that all the exchanges quickly reached consensus on a set of uniform circuit breakers that would be triggered when needed. Today's filings reflect that consensus. I am pleased by the constructive cooperation of the exchanges and FINRA as evidenced by their rapid response.”

According to the proposed rules the five-minute pause in trading when a stock experiences a 10 percent change in price over the previous five minutes would give markets, “the opportunity to attract new trading interest in an affected stock, establish reasonable market price, and resume trading in a fair and order fashion.”

The proposed rules are subject to SEC approval following the 10-day public comment period. If approved the rules would be in effect on a pilot basis through December 10, 2010.

Added Schapiro, “I believe that circuit breakers for individual securities across the exchanges would help to limit significant volatility. They would also increase market transparency, bolster investor protection, and bring uniformity to decisions regarding trading halts in individual securities.”

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