In the wake of the “flash crash” on May 6, the Securities and Exchange Commission (SEC) has been testing new rules aimed at preventing a repeat. Now stock exchanges want those new rules to be extended to exchange traded funds (ETFs), as well.
The “circuit breaker” rules halt trading for five minutes once an individual stock moves 10% in either direction within five minutes. Right now, the stocks in the S&P 500 are subject to the new rules. The NYSE Euronext and NASDAQ are going to ask the SEC to add more companies to this list, as well as more than 300 ETFs. [The SEC’s Crackdown on Target-Date Funds.]
Nina Mehta for Bloomberg reports that the SEC has promised to include ETFs in the pilot eventually but has not suggested when, saying only it would happen “as soon as practicable.” [More Details on the ‘Circuit Breakers.’]
One issue is that since ETFs are baskets of stocks, halts in trading in underlying shares could make it difficult for authorized participants to accurately price the funds. If this is the case, it would cause them to not trade at their net asset value (NAV). It’s an issue that clearly needs to be worked out before the circuit breakers can be extended to ETFs.
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.