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SEC to publish for public comment stock-by-stock circuit breaker rule proposals

Wednesday, May 19, 2010
Opalesque Industry Update - Alert from Pillsbury Winthrop Shaw Pittman LLP, a U.S. full-service law firm.

The Securities and Exchange Commission (the “SEC”) announced that in response to the market disruption of May 6, the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) are filing proposed rules today under which they would pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period.

The SEC is seeking comment on the proposed rules.

The exchanges are proposing these rules in consultation with FINRA and staff of the SEC to provide for uniform market-wide standards for individual securities in the S&P 500® Index that experience a rapid price movement.

The SEC claims that these proposed rules reflect a consensus that was achieved among the exchanges and FINRA after SEC Chairman Mary Schapiro convened a meeting of exchange leaders and FINRA at the SEC early last week. That meeting took place after the market dropped significantly and after approximately 30 S&P 500 Index stocks fell at least 10 percent in a five-minute period.

Chairman Schapiro believes that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges, and that it is important that all the exchanges quickly reach a consensus on a set of uniform circuit breakers that would be triggered when needed.

Under the proposed rules, which are subject to SEC approval following the completion of the comment period, 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 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 breaker as warranted based on their experience, and to expand the scope to securities beyond the S&P 500 (including ETFs) as soon as practicable.

The proposed rules will be available on the SEC's website as well as the websites of each of the exchanges and FINRA. The SEC intends to promptly publish the proposed rules for a 10-day public comment period, and determine whether to approve them shortly thereafter. The typical comment period for SEC rule proposals is 60 days or longer.

During the pilot period, Chairman Schapiro has asked the SEC staff to consider ways to address the risks of market orders and their potential to contribute to sudden price moves, as well as to consider steps to deter or prohibit the use by market makers of "stub" quotes, which are not intended to indicate actual trading interest. The staff will study the impact of other trading protocols at the exchanges, including the use of trading pauses and self-help rules. The SEC staff also will continue to work with the exchanges and FINRA to improve the process for breaking erroneous trades, by assuring speed and consistency across markets.

The SEC staff is working with the markets to consider recalibrating market-wide circuit breakers currently on the books — none of which were triggered on May 6. These circuit breakers apply across all equity trading venues and the futures markets.


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