Last May’s flash crash still has regulators thinking about solutions, and their latest plan involves a “limit up/limit down” trading system, according to reports. Exchange traded funds (ETFs) would be covered under this new approach.
According to a Securities And Exchange Commission proposal, the share prices of stocks already covered by the current circuit-breaker program wouldn’t be permitted to move by more than 5% above or below the average share price in the preceding five minutes. There is a trading band set at 10% of all other shares, reports The Wall Street Journal. [Could SEC Circuit Breakers Cause Problems In ETFs?]
During the flash crash of May 6th, the overall market fell sharply over a few minutes, and share prices plunged, some even down 60%. In the chaos, some shares and ETFs traded down to one cent per share, or lost all value. The old circuit breaker rule dictated that trading would be halted for five minutes once an individual stock moves 10% in either direction within five minutes.
Joe Morris for Ignites also reports that the percentage bands would be doubled during the opening and closing periods, and broader price bands would be required for stocks priced below $1. If trading were unable to occur within the price band for more than 15 seconds, trading would be paused for five minutes. Basically, this new plan will freeze all trades in a stock or ETF if the security crosses the price range since it would be less disruptive to trading activity.
Independent regulator FINRA has agreed to use this trading system for one year to see how effective it will be. The new rules will supersede the single circuit breaker program already in effect. [Plans To Extend ETF Circuit Breaker Program.]
Tisha Guerrero contributed to this article.
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