SEC changing rules for when exchanges halt trading

June 1, 2012 - 3:16 PM

WASHINGTON (AP) — Federal regulators are changing the rules for when a dramatic shift in value of the stock market or individual stocks triggers exchanges to halt trading.

The changes are aimed at curbing wild swings in prices such as occurred in the "flash crash" of May 6, 2010 when the Dow Jones industrial average dropped nearly 600 points in five minutes.

The Securities and Exchange Commission approved the changes, which were requested by the U.S. exchanges. The SEC said Friday they will take effect in a one-year pilot program to start by Feb. 4.

One change affects circuit breakers, measures that automatically halt trading if the market falls by certain percentages. Circuit breakers will be triggered by smaller market declines than they are now, but the halts won't last as long.

In addition, so-called "limit up-limit down" rules for individual stocks will bar any trades outside specified price boundaries. That will limit how much a stock's price can rise or fall in a given day.

The current system of circuit breakers was established by the New York Stock Exchange in 1988 in response to a stock market plunge in October 1987. They were triggered only once — in October 1997 when an economic crisis in Asia set off a wave of heavy selling. After the "flash crash" two years ago, regulators looked at updating the circuit breakers.

The SEC approved the changes Thursday.

They are "the product of a significant effort to devise a sophisticated, yet workable and effective way to protect our markets from excessive volatility," SEC Chairman Mary Schapiro said in a statement.

Circuit breakers are intended to force traders to take a breather and refocus on economic and corporate news instead of an alarming market nosedive. They can't prevent people from losing money; they're aimed at keeping the market from succumbing to huge, snowballing, panic-driven sell-offs in a single day.

They now halt trading if the Dow Jones industrial average tumbles 10 percent, 20 percent or 30 percent. The new triggers will be drops of 7 percent, 13 percent or 20 percent in the Standard & Poor's 500-stock index.

At the same time, the trading halts will be shortened to 15 minutes from the current 30 minutes, hour or two hours.

For major stocks in the S&P 500, the Russell 1000 index and some others, the "limit up-limit down" rules will bar trades at prices 5 percent or more above and below the stock's average price in the preceding five minutes. For other stocks, the level is 10 percent or more. Those levels will be doubled during the market's opening and closing periods. Stocks priced at $3 a share or less will be subject to broader no-trading bands.