The Securities and Exchange Commission (SEC) has green-lighted the idea to implement their circuit breakers on more than 344 different exchange traded funds (ETFs) in an effort to ensure that there are no more “broken trades.”
The so-called circuit breaker rules that were introduced after the Flash Crash of May 6th are ready to be used for 344 ETFs and all the securities listed in the Russell 100 Index of large-cap stocks. Steve Dew for Index Universe explains that the circuit breakers will pause trading in individual securities uniformly across the major U.S. markets for a five-minute period in the event that any security experiences a 10% price change in a five-minute period. [Circuit Breakers in Place for Stocks.]
The new breakers are going to be used with some of the most heavily-traded ETFs, as well as some inverse and leveraged funds and a few exchange traded notes (ETNs). The new plan is to expand the menu of investment tools for which circuit breakers can help regulate. There are many more single stocks and ETFs that need the regulatory green light for circuit breaker trading to begin. [How the Flash Crash Affected ETFs.]
It will be interesting to see how this works, given that the price of an ETF is determined by the prices of its underlying holdings. If trading pauses in them, will we see wider bid-ask spreads? Keep an eye on it in the event that this occurs.
For more stories about ETFs, visit our ETF 101 category.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.