FINRA Initiatives Addressing Market Volatility Approved by the SEC

The Securities and Exchange Commission has approved a one-year pilot for a plan meant to shield equity markets from volatile price changes. The plan is based on two initiatives from the Financial Industry Regulatory Authority and the national securities exchanges.

One initiative involves a “limit up-limit down” proposal that would not allow for trades in US listed stocks beyond a certain range to be determined by recent prices. This will replace single-stock circuit breakers.

With the new mechanism, trades in individually listed equity securities wouldn’t be able to take place beyond a certain price band, which would be a percentage level lower and higher than the price of the security in the most recent five minutes. For securities that are more liquid, set levels would be 5% or 10%, with percentages doubling during closing and opening periods. For securities priced at $3/share or lower, there will be wider price bands.

The second proposal involves modifying current market-wide circuit breakers that can stop trading taking place in exchange-listed securities on US markets. The current market-wide circuit breakers have only been triggered once (in 1997) since they were adopted nearly 24 years ago. These changes will reduce the percentage-decline threshold for triggering a trading stop that is market-wide, while shortening the duration of time that the cessation lasts.

SEC Chairman Mary Schapiro has said that the initiatives are the result of a lot of work done to come up with a sophisticated, effective, and doable way to take care of markets in the wake of too much volatility. She also talked about how in today’s electronic markets, there is a need for a properly calibrated automated way to limit or pause trading should prices change too much or too quickly.

The SEC, FINRA, and the exchanges plan to closely monitor the pilot to ensure that any rules that are permanently approved are as effective as possible. February 4, 2013 is the deadline for implementing all these changes.

Shepherd Smith Edwards and Kantas, LTD LLP Partner and securities lawyer William Shepherd, however, is already skeptical of this new plan: “Such limits are not new and are of questionable value. Commodities markets have limit circuit breakers, as do a number of stock markets outside the US. The SEC has employed limits from time to time, notably after the stock market crash of 1987. This latest effort comes as a result of the so-called ‘flash crash’ in 2010. While no definitive cause was ever determined, many observers insist that stock manipulation by large players was involved. If implemented at all, as before, any such limits would likely be short lived.”

Our securities lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP represent institutional and individual investors.

SEC Approves Proposals to Address Extraordinary Volatility in Individual Stocks and Broader Stock Market, SEC, June 1, 2012

SEC approves plan to ease volatility in US stocks, Reuters, June 1, 2012

More Blog Posts:
Look Out for Rule Recommendations on Consolidated Audit Trail, Market-Wide Circuit Breaker Changes, and Limit Up-Limit Down Mechanisms, Institutional Investor Securities Blog, March 10, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge, Institutional Investor Securities Blog, May 30, 2012

SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012