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SEC to implement 'circuit breakers' when stock prices dive

WASHINGTON — The Securities and Exchange Commission announced new measures Tuesday aimed at avoiding a repeat of the market swoon earlier this month, saying that it would propose that trading in any given stock would be paused if a stock dives more than 10 percent in five minutes.

The rules would apply across all trading venues. The halt in trading would last five minutes.

The proposal, which will be implemented in the next few weeks, is a response to several lessons of May 6, when the Dow Jones Industrial Average plummeted nearly 1,000 points in a matter of minutes. Existing triggers, or "circuit breakers," that would pause trading were outdated and did not go into effect. Meanwhile, different rules governing when to stop trading led to irregularities across the market.

"We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges," SEC Chairwoman Mary Schapiro said. "I believe that circuit breakers for individual securities across the exchanges would help to limit significant volatility."

The SEC and the Commodity Futures Trading Commission also released a report Tuesday citing six theories on what may have caused the market's sudden gyrations, saying it was likely that speculative trades linked to the direction of the overall market helped fuel the declines.

The regulators' report sheds little light on which firms, traders and events caused the volatility. But the report underscores how the fate of the stock market today is guided largely by speculators making bets on far-flung exchanges that influence the prices of blue-chip stocks.

The surge of volatility on May 6 exposed flaws in the electronic guts of the trading system and highlighted the market's vulnerability to high-speed, computer-driven traders making decisions about what to buy and sell based on mathematical formulas.

A full account of what happened May 6 may take many months to complete, as it did after the spectacular market crash of Oct. 19, 1987, also known as Black Monday. While today's markets are virtually all electronic, making collection of data easier, the amount of data is far larger. In 1987, about 600 million shares were traded daily. On May 6, 19.5 billion shares were exchanged, comprising 66 million trades.

The SEC is looking at several other practices.

The agency is contemplating how to reduce the use of "stub" quotes. These quotes allow market-makers — firms that agree to buy and sell shares to ensure that investors can make trades — to technically stay active in the market as is required by some exchanges.

But the "stub" quotes are usually far below or above what the market is asking and are almost never executed. On May 6, trades were executed at "stub" prices. Subsequently, exchanges have canceled those trades.

The agency will also look at whether short-term trading strategies, such as those that use computer analysis to make split-second decisions, need to be curtailed, as well as proposals to make it easier to capture and analyze trading patterns across markets.

SEC to implement 'circuit breakers' when stock prices dive 05/18/10 [Last modified: Tuesday, May 18, 2010 9:38pm]
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