Could SEC Circuit Breakers Cause Problems in ETFs? | ETF Trends

The Securities and Exchange Commission (SEC) has extended its circuit breaker program to cover certain exchange traded funds (ETFs), sparking worries about unintended consequences.

The changes, which will take place next week, are aimed at preventing a repeat of the “flash crash” that happened on May 6.

Steve Dew and Oliver Ludwig for Index Universe report that in addition to covering every stock in the S&P 500, it will also extend to 344 ETFs. Under the program, trade is halted in a stock that moves more than 10% in five minutes. [Regulation Hits ETFs.]

The major concern surrounding to program is that it could end up destabilizing financial markets if they don’t work as they should. For example, one trader says that the rule would cease trading on a heavily traded ETF if a single bid or ask is 10% or more from the last good sale. Under the rule, trading in the SPDR S&P 500 ETF (NYSEArca: SPY) would have been halted twice in the last 18 months. [When Circuit Breakers Debuted…]

This, says the trader, may mean that some of the most heavy traders may withdraw from the marketplace if the most highly liquid ETFs were halted from trading. This would further decrease overall liquidity in the markets – something that contributed to the flash crash.

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.