WASHINGTON - The US Securities and Exchange Commission Thursday approved rules that will require the exchanges to pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period.
The rules, which were proposed by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) and published for public comment, come in response to the market disruption of May 6, when the Dow Jones industrials lose nearly 1, 000 points in less than half an hour.
The SEC anticipates that the exchanges and FINRA will begin implementing the newly-adopted rules as early as Friday, June 11.
"The May 6 market disruption illustrated a sudden, but temporary, breakdown in the market's price setting function when a number of stocks and ETFs were executed at clearly irrational prices," said SEC Chairman Mary Schapiro, who convened a meeting of the exchange leaders and FINRA at the SEC following the market disruption.
"By establishing a set of circuit breakers that uniformly pauses trading in a given security across all venues, these new rules will ensure that all markets pause simultaneously and provide time for buyers and sellers to trade at rational prices," he said.
Under the new rules, trading in a stock would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes.
The pause, which would apply to stocks in the S&P 500 Index, would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion, said the SEC in a statement.
Initially, these new rules would be in effect on a pilot basis through December 10, 2010.
The markets will use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breakers as warranted based on their experience, and to expand the scope to securities beyond the S&P 500 as soon as practicable.
"It is my hope to rapidly expand the program to thousands of additional publicly traded companies," said Schapiro.