SEC Approves Market Circuit Breaker Rules

The Securities and Exchange Commission [SEC] said on Thursday it approved rules that will require the exchanges and FINRA to pause trading in certain stocks if the price moves 10% or more in a five-minute period. The pause is designed to give traders time to assess whether a stock’s abrupt PPS change stems from a real shift in value of the security or an unrelated market hiccup.

The rules come in response to the market’s May 6 meltdown, which caused a breakdown in the market’s price setting function, prompting the Dow Jones Industrial Average to plummet almost 1,000 points before partially recovering.

SEC: “Under the rules, trading in a stock would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. The pause, which would apply to stocks in the S&P 500® Index, would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion. Initially, these new rules would be in effect on a pilot basis through Dec. 10, 2010.

The markets will use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breakers as warranted based on their experience, and to expand the scope to securities beyond the S&P 500 (including ETFs) as soon as practicable.”

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