Circuit Breakers: SEC Order Approves Proposals to Address Extraordinary Volatility in Individual Stocks and Broader U.S. Stock Market

Sullivan & Cromwell LLP - June 11, 2012

On May 31, 2012, the SEC approved two proposals submitted by the national securities exchanges and FINRA that are designed to address extraordinary volatility in individual listed stocks and the broader U.S. stock market. The exchanges and FINRA will implement these changes by February 4, 2013 on a one-year pilot basis.

One initiative establishes a “limit up-limit down” mechanism that will prevent trades in individual exchange-listed stocks from occurring outside a price band determined by reference to recent trading prices for the relevant stock. In addition, the primary exchange will be required to impose a five to ten minute trading pause in an individual stock to accommodate more fundamental price moves in the stock. When implemented, this new mechanism will replace the existing single-stock circuit breakers that the SEC approved on a pilot basis in 2010 in reaction to the “flash crash” of May 6, 2010.

The second initiative updates existing market-wide circuit breakers that, when triggered, halt trading in all exchange-listed securities throughout the U.S. markets. The existing market-wide circuit breakers were adopted in October 1988 and have been triggered only once, in 1997. The changes lower the percentage-decline thresholds for triggering a market-wide trading halt and shorten the amount of time that trading is halted. Market declines will be measured by reference to the Standard & Poor’s 500 Index rather than the Dow Jones Industrial Average, and the trigger thresholds will be calculated daily rather than quarterly.