September 10, 2010

U.S. financial regulators intensified their efforts to prevent a sequel to the May 6 Flash crash, moving to the expand Securities and Exchange Commission’s recently adopted circuit breaker to include Russell 1000 stocks.

The SEC said the move comes in response to rule proposals submitted by national securities exchanges and the Financial Industry Regulatory Authority. The new measures also clarify the procedure for breaking erroneous trades, since the process was unclear in the wake of the May 6 plunge, which wiped nearly $1 trillion in value from stocks in a matter of minutes before a swift rebound.

“These circuit breakers, and this more objective guidance on breaking erroneous trades, will help our markets retain the confidence of investors and companies,” SEC Chairman Mary Schapiro said in a statement. “We have worked quickly with the exchanges to take these steps, and we will continue to be very focused on addressing weaknesses exposed on May 6.”

The new measures may be implemented early next week, the SEC said.

According to the SEC, the markets only broke trades that were more than 60 percent away from the reference price following the May 6 crash. Under the new guidelines, stocks that are subject to the circuit breaker will be broken at specified levels based on their price.

For instance, the SEC said trades on stocks priced at $25 or less will be broken if the deals are at least 10 percent away from the price triggering the circuit breaker.

For stocks worth between $25 and $50, trades will be broken if they’re 5 percent away from the trigger price. And for shares worth more than $50, the threshold is 3 percent.

The SEC added that it’s working with exchanges to stop market makers from using “stub” quotes that aren’t intended to indicate actual trading interest. The regulator also said it’s studying the potential impact of exchanges having their own circuit breakers and methods for handling gyrating markets.

The Nasdaq Stock Market rolled out its own circuit breaker, the Nasdaq Volatility Guard, after the SEC implement its pilot program. The move drew criticism from BATS Exchange Chief Operating Officer Chris Isaacson, who called for a market-wide system.

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 ...