Circuit Breaker Rules to Be Unveiled Next Week

Update on circuit breakers. Here's where we stand:

1) The SEC itself will make an announcement on new rules early next week, likely Monday.

2) At the same time, the exchanges will make a regulatory filing that will reflect the changes in their own rulebook.

What's happening now:

1) SEC is evaluating proposals that would create new rules on: a) uniform individual stock circuit breakers, b) a global circuit breaker, and c) busting trades.

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The biggest issues: a) what percentage should the individual stock circuit breakers kick in (some are proposing a 25 percent drop, but it seems it will be close to 10 percent), b) how long do they last (1 minute, 2 minutes?), what is a fair percentage range for busting trades.

2) Exchanges are talking amongst themselves and with the brokerage firms on how these changes will be implemented.

Time to implement? Likely 30 to 60 days. Why? This a complicated technology issue.

What happens after the rules get changed? This is just the beginning. More changes will likely be coming down the road.

First, the SEC will likely seek to create a centralized audit trail. The SEC does not routinely collect centralized trading data, and with the market fragmented into many liquidity pools the SEC has had a hard time gathering data to determine what happened last Thursday.

That is going to change.

The new audit trail will likely be collected by FINRA; they will also be the centralized repository for the data. Then, if something happens, FINRA has all the data on site.

This means broader monitoring of everyone, not just brokerage firms. In particular, expect more careful surveillance of the following 3 groups:

1) High frequency traders. Right now, they have NO AFFIRMATIVE OBLIGATION to support the markets, despite claims that they are "liquidity providers."

2) Darkpools. These are pools of liquidity that are not in the market. Expect a push for more transparency of what is in those pools.

3) Iinternalizers. Many big Wall Street firms internalize their trades—that is, they match buy and sell orders from their own inventory, not exposing them to the broader market, then simply print them on an exchange. There has been criticism that these internalizers commit very little capital above the market.

The key takeaway from my discussions with market participants: the SEC will be gathering more data, on everyone.

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