The Securities and Exchange Commission today announced that the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) are filing proposed rules to clarify the process for breaking erroneous trades. The rules would make it clearer when, and at what prices, trades would be broken.
The proposed rules come in response to the market disruption of May 6 and complement last week’s SEC approval of a uniform set of stock-by-stock circuit breakers. Those circuit breakers are now being implemented on a pilot basis for S&P 500 stocks at every exchange and by FINRA.
The exchanges and FINRA are proposing a series of thresholds for breaking trades when prices diverge from the “reference price,” typically the last sale before pricing was disrupted. On May 6, the exchanges only broke trades that were more than 60 percent away from the reference price in a process that was not transparent to market participants.
Under current rules, there is not a clearly defined standard used for breaking erroneous trades. Exchanges may choose the specific percentage threshold away from the reference price where trades are broken. Today’s rule proposals set forth clearer standards for breaking trades and curtail the exchanges’ discretion to select a different percentage threshold at which they would break trades.
Under the proposed rules for stocks that are subject to single stock circuit breakers, trades would be broken at specified levels.
- For stocks priced $25 or less, trades would be broken if the trades are at least 10 percent away from the circuit breaker trigger price.
- For stocks priced more than $25 to $50, trades would be broken if they are 5 percent away from the circuit breaker trigger price.
- For stocks priced more than $50, the trades would be broken if they are 3 percent away from the circuit breaker trigger price.
Where circuit breakers are not yet applicable, the exchanges and FINRA propose to break trades at specified levels for events involving multiple stocks depending on how many stocks are involved.
- For events involving between five and 20 stocks, trades would be broken that are at least 10 percent away from the reference price.
- For events involving more than 20 stocks, trades would be broken that are at least 30 percent away from the reference price.
“Establishing clear and transparent standards for breaking trades helps provide certainty in advance as to which trades will be broken, and allows market participants to better manage their risks,” said SEC Chairman Mary L. Schapiro.
Today’s proposed rules, which similar to the circuit breaker rules also are proposed to be in effect on a pilot basis through Decemeber 10, 2010, will be available on the SEC’s website as well as the websites of each of the exchanges and FINRA. The Commission intends to promptly publish the proposed rules in the Federal Register for a 21-day public comment period.
For related Compliance Avenue posts on this topic, see:
New SEC Circuit Breaker Rule Halts Washington Post Trading (posted June 16, 2010)
SEC Approves New Stock-by-Stock Circuit Breaker Rules (posted June 12, 2010)
SEC Proposes Stock-by-Stock Circuit Breaker (posted May 19, 2010)