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What's Next for Circuit Breakers?

What's next for circuit breakers? A day after the exchanges testified in the House of Representatives, exchange officials and lawyers are busy writing new rules. Based on discussions with exchange and government officials, here's a likely timetable:

1) The exchanges last night sent recommendations to the SEC

2) The SEC is now reviewing the recommendations

3) In (likely) a matter of days, the exchanges will post the new rules to the SEC website. The rules will likely come into effect IMMEDIATELY or after a few days. However, the SEC may allow a short period (30 days perhaps) to allow for comment, while keeping the rule in effect. It will stay in effect unless abrogated by the SEC.

Here's what the rules will address:

1) All the exchanges will write a new rule that will create uniform individual stock circuit breakers that all exchanges will adhere to. It is not yet clear whether the NYSE will keep its current individual stock circuit breakers (LRPs, or Liquidity Replenishment Points) in addition to new circuit breakers.

2) All the exchanges will be writing new rules on a global circuit breaker—the current circuit breaker requires shutdowns of the markets for various periods if the Dow drops 10, 20 and 30 percent. This benchmark will be switched to the S&P 500, and the terms under which trading stops will also be tightened.

3) There will be a rule that creates a uniform policy on busting trades. The decision to bust trades executed 60 percent away from the market from 2:40 PM to 3:00 PM last Thursday was widely criticized. The 60 percent decision was purely arbitrary.

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