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New rules for broken trades proposed Regulators put forward proposed rules spelling out when stock trades are canceled
Marcy Gordon, AP Business Writer, On Thursday June 17, 2010, 7:30 pm EDT WASHINGTON (AP) -- Federal regulators on Thursday put forward proposed new rules spelling out when and at what prices stock trades would be canceled, in a response to last month's "flash crash" in the market.
The Securities and Exchange Commission said it is publishing for public comment the rules proposed by the major U.S. exchanges and the brokerage industry's self-policing organization. Under the proposal, there would be a series of thresholds for canceling trades when prices diverge from the last sale before pricing was disrupted. The higher the value of a stock, the smaller the divergence would have to be to trigger a cancellation.
Nearly 21,000 trades were canceled in the May 6 market plunge because exchanges deemed them erroneous. Many retail investors were affected, and lawmakers have pressed for remedies. There currently is no clearly defined standard.
The idea is to bring consistency to the rules governing broken trades, the SEC said. Each exchange now has the discretion to choose the level at which trades are canceled.
In the May 6 plunge, the exchanges only canceled trades that diverged by more than 60 percent from the last sale price. The SEC says that process wasn't transparent to investors. The agency has been examining whether decisions to cancel trades were made fairly and whether market professionals fully met their legal obligations to investors.
"Establishing clear and transparent standards for breaking trades helps provide certainty in advance as to which trades will be broken, and allows market participants to better manage their risks," SEC Chairman Mary Schapiro said in a statement.
Last week the SEC put in a new system of "circuit breakers" for individual stocks, designed to prevent a repeat of the May 6 disruption that saw the Dow Jones industrials lose nearly 1,000 points in less than a half-hour. The new rules call for U.S. stock exchanges to briefly halt trading of major stocks that mark big swings.
Trading of any S&P 500 stock that rises or falls 10 percent or more in a five-minute span must be halted for an additional five minutes. The circuit breakers are applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time -- almost the entire trading day.
The circuit breaker system will be in effect on a pilot basis through Dec. 10.
On May 6, about 30 stocks listed in the S&P 500 index fell at least 10 percent within five minutes. The drop briefly wiped out $1 trillion in market value as some stocks traded as low as a penny.
Under the proposal for canceled trades, stocks covered by the circuit breakers would have their trades broken at certain levels.
For stocks priced $25 or less, trades would be canceled if they diverged by at least 10 percent from the circuit-breaker trigger price. For stocks at $25 to $50, trades would be canceled if they diverged by at least 5 percent. Stocks above $50 would have to diverge by at least 3 percent from the circuit-breaker trigger price to be canceled.
There would be a different set of thresholds for stocks not covered by the circuit breakers.
Like the new circuit-breaker regime, the proposed rules for broken trades would be in effect for a six-month pilot program. The public comment period for the proposed rules will extend for 21 days.
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