Proposed by the national securities exchanges and the
Financial Industry Regulatory Authority in the wake of the
chaotic trading of that day, the rules were accepted as policy
yesterday (Thursday) by the US Securities and Exchange
They will oblige all exchanges and Finra to halt trading in
any stock that rises or falls more than 10% in a five minute
period. The halt will last for five minutes and must be applied
by all trading venues at once. Listed options on the suspended
stock would also be frozen.
circuit breakers will come into effect 15 minutes after the
stockmarkets’ 9.30am opening in New York, and will
be turned off for the last 25 minutes of the day, up to
At first only stocks in the S&P 500 Index will be
covered, but after the initial pilot period until December 10,
the SEC is keen to extend the circuit breakers to "thousands"
more listed stocks and exchange-traded funds. The rules may
also be tweaked after the pilot.
Such automatic suspensions are
used at many exchanges – for example, the Russian
Trading System Stock Exchange often had to close completely for
a morning or afternoon session during the savage bear market of
And on May 20 this year, Eurex
suspended trading in front month Euro Stoxx 50 Index Futures,
one of its most liquid contracts, due to an extreme fall. The
exchange’s volatility interruption safeguard is
triggered if an instrument moves outside a predefined range,
which the exchange does not disclose, within a set period.
Eurex used the safeguard several times in May, including on May
Risk of making things
Critics say circuit breakers could
exacerbate volatility by making market participants even more
eager to get out of losing positions as soon as the suspension
The SEC and Commodity Futures
Trading Commission have not yet finished their investigation
into the May 6 flash crash, but it is thought that a sharp fall
in price of the E-Mini S&P 500 Index Futures at CME Group
might have triggered preset sell orders in many trading
algorithms, causing a sudden run on US stocks, indices and
Most of these soon recovered to
what the SEC called "prices consistent with their pre-decline
levels", but many trades were made at the depressed prices,
some of them 60% lower than a few minutes earlier.
The events fed a general anxiety,
shared by the public, some politicians and regulators, and many
market participants, that the rapid growth of high frequency
algorithmic trading may have made markets less stable.
At one of the panels on high
frequency trading at the FIA/FOA International Derivatives Expo
in London this week, most of the panellists admitted they were
worried by the potential consequences of HFT, even though all
the speakers were involved commercially with HFT in some
At another panel, Steve Grob,
director of strategy at software vendor Fidessa, said it was
"quite simple" what happened on May 6: "A bunch of market
makers on CME stopped making markets in the S&P. That meant
cash players couldn’t hedge their positions, so
they pulled out of the cash market." Grob meant to argue that
HFT had not played any sinister part in the events.
Algos in the
Nevertheless, it is clear
computer-driven trading is the target of the circuit breakers.
The SEC is not trying to stop stocks crashing (or zooming up),
just to interrupt glitch-like trading in which a spiral of
triggered orders can push a stock too far.
May 6 market disruption illustrated a sudden, but temporary,
breakdown in the market’s price-setting function
when a number of stocks and ETFs were executed at clearly
irrational prices," said SEC chairman Mary Schapiro in the
statement announcing the rules. "By establishing a set of
circuit breakers that uniformly pauses trading in a given
security across all venues, these new rules will ensure that
all markets pause simultaneously and provide time for buyers
and sellers to trade at rational prices."
pause is intended, the SEC said, "to 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".
Schapiro has also asked SEC staff to:
- Consider ways to address the risks of market orders and
their potential to contribute to sudden price moves
- Consider steps to deter or prohibit market
makers’ use of 'stub’ quotes, which
are not intended to indicate actual trading interest.
- Study the impact of other trading protocols at the
exchanges, including the use of trading pauses and self-help
- 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 also working with the markets to consider
recalibrating marketwide circuit breakers already on the books
which apply to all equity trading venues and the futures
markets. None of these safeguards were triggered on May 6.
The regulator received 26 comments on its proposals between
May 24 and June 7. Most were broadly supportive, though often
suggesting variations on the proposals. A few suggested
alternative safeguards be used, including using a futures-style
'limit down’ instead of a circuit breaker, or
allowing trading at prices that reverse the triggering price
Jon Hay +44 207 779 8372 email@example.com