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SEC To Sharpen Circuit Breaker Rules

The U.S. Securities and Exchange Commission will strengthen the 23-year-old circuit breakers that failed to stop the acceleration of last year's flash crash.

The U.S. Securities and Exchange Commission announced plans to strengthen the 23-year-old circuit breakers that failed to stop the acceleration of last year's flash crash.

The regulator said a number of exchanges and the Financial Industry Regulatory Authority are pushing to reduce the market decline percentage that would trigger the circuit breaker, along with shorter trading pauses once the markets are halted.

The SEC said that if approved, the new market-wide circuit breaker rules would replace the ones it implemented in 1988 in response to Black Monday Crash that saw the S&P 500 lose 20.4 percent of its total value, and the Dow Jones Industrial Average plummet by 508 points. That system was only triggered once since going into effect, back in 1997, and failed to stop the single-worst intraday plunge in the history of the Dow Jones average. Since then, the SEC has required exchanges to pause trading in individual stocks if their price moves more than 10 percent in a 5-minute period.

Under the latest proposal, the SEC said it would use a stock's movement on the S&P 500 index to determine whether the circuit breaker would be used, rather than the Dow Jones. The regulator added that S&P 500 declines of 7, 13, and 20 percent from the prior day's close would halt trading, down from the prior thresholds of 10, 20 and 30 percent.

Meanwhile the proposed rules would shorten the duration of trading halts to 15 minutes, pauses which could only occur between 9:30 a.m. and 3:25 p.m.

"This new market-wide circuit breaker, together with the other post-flash crash measures is designed to reduce extraordinary volatility in our markets," SEC chairman Mary Schapiro said in a statement. "We look forward to reviewing the comments, including any views on how the proposed circuit breakers might work together with the proposed limit-up, limit-down mechanism for individual securities."

The change is expected to take effect at the end of a 21-day public comment period.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio

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