SEC expands stocks under 'circuit breakers'

[September 11, 2010]  WASHINGTON (AP) -- Federal regulators on Friday expanded the number of stocks covered by new "circuit breakers" that can pause volatile trading, a program in response to the panicked May 6 market plunge.

The Securities and Exchange Commission approved expansion of the six-month pilot program of circuit breakers for stocks in the Standard & Poor's 500 index. Now all stocks in the Russell 1000 index also will be covered. The expansion was proposed to the SEC by the stock exchanges and had been expected.

The pilot program, which began in mid-June, briefly halts trading of stocks that make big price swings. Trading of covered stocks that rise or fall 10 percent or more within a five-minute span is halted for five additional minutes.

The "flash crash" on May 6 saw the Dow Jones industrials plunge nearly 1,000 points in less than a half-hour. About 30 stocks listed in the S&P 500 index fell at least 10 percent within five minutes.

Regulators and lawmakers have acknowledged that the massive disruption undermined investors' confidence in the financial markets.

U.S. stock exchanges and the brokerage industry's self-policing organization are expected to begin putting the expanded circuit breakers into effect early next week, the SEC said in a news release.

The trading halts "give the markets an opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion," the agency said.

The regulators haven't pinpointed a single cause for the May 6 breakdown. They have cited a number of factors, including a severe draining of cash from the market that may have been worsened by the withdrawal of electronic traders and the use of so-called 'stop-loss" market orders. Stop-loss orders set the price at which a stock is automatically sold when it declines to a specified level.

The SEC commissioners also approved new rules, proposed by the exchanges, that spell out when and at what prices erroneous stock trades should be canceled.

Nearly 21,000 trades were canceled in the market plunge because exchanges deemed them erroneous. Many retail investors were affected. SEC officials have said the goal is to bring consistency to the rules governing broken trades.

"These circuit breakers and this more objective guidance on breaking erroneous trades will help our markets retain the confidence of investors and companies," SEC Chairman Mary Schapiro said in a statement. "We have worked quickly with the exchanges to take these steps, and we will continue to be very focused on addressing weaknesses exposed on May 6."

Schapiro said in a speech Tuesday that anxiety over the flash crash may have contributed to the withdrawal of retail investors from the stock market in recent months.

Schapiro also called the circuit breakers for individual stocks "an essential first step" that can be improved. She said the agency's next steps likely will include a review of so-called "limit up-limit down" requirements that would bar any trades outside specified boundaries. Limit up-limit down restrictions, which apply to the commodity futures markets, impose a maximum price change higher or lower in a given day.

The SEC already has rules requiring market-wide halts in trading if the Dow average falls 10 percent, 20 percent or 30 percent. They also are known as circuit breakers. None of them were triggered on May 6.

Under the new rules for canceled trades, stocks covered by the circuit breakers will have their trades broken at certain levels.

For stocks priced $25 or less, trades will be canceled if they diverged by at least 10 percent from the circuit-breaker trigger price. For stocks at $25 to $50, trades will be canceled if they diverged by at least 5 percent. Stocks above $50 will have to diverge by at least 3 percent from the circuit-breaker trigger price to be canceled.

There will be a different set of thresholds for stocks not covered by the circuit breakers.

Like the circuit-breaker regime, the new rules for broken trades will be in effect through Dec. 10.

[Associated Press; By MARCY GORDON]

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.