In an effort to obviate another “flash crash” similar to the one that occurred in May, the Securities and Exchange Commission (SEC) is expanding its circuit-breaker program to include exchange traded funds (ETFs) and is setting an outline on how to deal with the “erroneous” trades that would be canceled.
The SEC will expand its circuit breaker program to cover the Russel 1000 large-cap index and around 350 of the most heavily traded ETFs and leveraged funds, writes Olivier Ludwig for IndexUniverse. The program will be in effect through Dec. 10 on a pilot basis. The Financial Industry Regulatory Authority (FINRA) will begin to expand the circuit breaker program starting this week. [ETF Criticisms: Fact or Fear?]
The circuit breakers will pause trading for five minutes on a security if the security sees a 10% price change within the previous five minutes. The result would help establish reasonable market price and fair trading. Market participants would also better able to manage risks. [Regulators Have An Eye On ETFs.]
Stocks subject to the circuit breaker program will experience paused trades depending on the following:
- Stocks at $25 or less will be halted if trades are 10% away from circuit breaker trigger price.
- Stocks at more than $25 to $50 will see trades broken if they are 5% away from circuit breaker price.
- Stocks at more than $50 will be broken if they are 3% away from the circuit breaker trigger price.
- Events that involve five to 20 stocks will experience breaks if trades are 10% away from a reference price.
- Events that involve more than 20 stock will experience halts if trades are 30% away from the reference price.
The SEC is also considering to expand the circuit breakers to all equity trading venues and futures markets. [Could Circuit Breakers Cause Problems in ETFs?]
For more information on ETFs, visit our ETF 101 category.
Max Chen 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.