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New circuit breakers for the stock market to avoid another Flash Crash were proposed by the Securities and Exchange Commission Tuesday. The new trading curbs would be applied at first as a trial run to all stocks on the Standard and Poor's Index. The SEC explains that these circuit breakers would stop any stock from trading if it moves more than 10 percent in five minutes. The trial will start after a 10-day comment period and will last through Dec. 10. The proposal is a response to the unexplained market slide May 6 that drove the Dow Jones industrial average down 700 points within just minutes.

Resource for this article: Will stock market circuit breakers stop another Flash Crash

NYSE circuit breakers and the focus on volatile stocks

NYSE circuit breakers already in place did not end up being set off during the May 6 Flash Crash, but those trading curbs are market-based — they don't apply at the individual stock level. Reuters reports that regulators and the exchanges have been under intense pressure to figure out what triggered the May 6 meltdown and do something to repair the integrity of U.S. stock markets. The exact cause of the Flash Crash has yet to be determined, but a mechanism to briefly halt trading across markets for a single stock is supposedly solution. A European news service called Reuters adds that the new NYSE circuit breakers are similar to stricter methods used in European markets. Circuit breakers at the London Stock Exchange are based only on the liquidity and volatility of the individual stocks.

Flash Crash exposes stub quotes

Nearly 1,000 points were lost in a matter of hours on May 6 during the stock market Flash Crash. Traders might have just been looking for cheap payday loans, and the Dow soon rebounded, but it finished the day down 347.80, or 3.2 percent, at 10,520.32. According to the New York Times, individual stocks may have suffered even more than the market at large. For a penny or less per share, five exchange traded funds, mutual funds that trade like stocks, were traded for. There were nine others trading at 15 cents or less. Stocks traded hands for a penny a share because of what the SEC calls "stub quotes," or placeholder bids that traders sometimes enter into the electronic system when they don't really want to buy or sell a stock, but want to stay in the game.

New NYSE circuit breakers will be more equitable

Thousands of trades in hundreds of stocks were canceled as a result of having been judged as “clearly erroneous,” executed by computer before traders were able to react to what was happening in the market. Market regulators canceled all of the trades that took place between 2:40 and 3 p.m. that were 60 percent or more below the last trade that took place before 2:40 pm. In the same exact article, Reuters says that some investors believe that the circuit breaker on individual stocks is a more equitable approach to prevent drastic, across-the-board trade cancellations.

"The broad market circuit breakers affect everybody, and could penalize people for what could be an index move," Lou Matrone, a sales trader at JonesTrading, told Reuters. "But the stock-based ones deal with it specifically on a case by case basis. You're not penalizing people for trading stocks where nothing is really going on, they're not being dragged in for a 'fat finger' problem or some other problem."

SEC considers other trading curbs

During the six-month circuit breaker trial period, the New York Times reports that the SEC will also consider other trading curbs discussed during a recent Congressional inquiry into the May 6 plunge. Those included ways to address the risks of market orders, a potential ban on so-called stub quotes of one or a few cents for a stock that is trading significantly higher than that, and the use of trading pauses at various exchanges.

Additional information at these websites

10-day comment period

http://sec.gov/news/press/2010/2010-80.htm

Reuters reports

http://www.reuters.com/article/idUSN1817385520100518

New York Times

http://www.nytimes.com/2010/05/19/business/19crash.html?partner=rss&emc=rss

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