Trader Talk

New Market-Wide Circuit Breakers Coming

After much delay, the SEC is filing proposals to revise the existing market-wide circuit breakers.

The changes reduce the percentage declines needed to halt trading and simplifies the structure of the circuit breakers. It also changes the reference index from the Dow Industrials to the S&P 500.

The current circuit breakers, adopted in October 1988, kick in when the Dow Industrials drop 10, 20, and 30 percent.

The only time the circuit breakers actually kicked in was Oct. 27, 1997, when traded was halted twice.

And that's the problem: they were useless during the "Flash Crash," because the Dow never dropped more than 10 percent.

The SEC has put out the proposed changes for a 21-day comment period.

The changes will greatly simplify the current cumbersome structure. It will:

1) Reducethe market decline percentage thresholds necessary to trigger a circuit breaker. Instead of 10, 20, and 30 percent declines, the threshold will be reduced to 7, 13, and 20 percent declines from the prior day’s closing price.

2) Shorten the duration of the trading halts to 15 minutes.

3) Simplify the time when the trading halts kick in. Now there will be only two trigger periods: those that occur before 3:25pm (when trading would be halted for 15 minutes), and those that occur on or after 3:25pm, when there would be no halt in trading.

4) Recalculate the trigger thresholds on a daily, rather than quarterly, basis.

The individual stock circuit breakers, which halt trading if the price of an individual stock moves 10 percent or more in a five-minute period, remains in effect.

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