SEC Proposes New Stock Trading Rules To Provide Cushion For Market Volatility

Wednesday, April 06, 2011 05:29
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SEC Proposes New Stock Trading Rules To Provide Cushion For Market Volatility

Tags: sec | stocks

Regulators want to switch from trading pauses to price limits in an effort to prevent “flash crashes” like the one that stunned the market last May.

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The new “limit up-limit down” proposal would prevent U.S.-listed equities from trading outside a narrow range defined by the stock’s average price over the preceding five minutes. It would replace the current effort, which halts trading for five minutes if a stock’s price rises or falls 10% or more within a five-minute period.


The proposed new price band is a more rigorous standard and is meant to avoid the problem of circuit breakers being triggered by erroneous trades.


Price band ranges will vary for different stocks, ranging from 5% to 10% of the average price for most equities but going even higher for those trading for less than $1. The new system also includes a backup provision to halt trading for five minutes if the price band prevents trades for more than 15 seconds.


The May 6 “flash crash” wiped out $862 billion in U.S. share value May 6. Such massive system failures are likely to become more common as electronic trading becomes more sophisticated, so the SEC proposal should provide welcome stability to investors. There will be a 21-day public comment period.

 

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