The SEC to Enact Change: What is Amendment 12?

The SEC put circuit breaker rules into effect with Amendment 12 to enact change.

On Nov. 20, 2018, Amendment 12 will go live. Given the relevance of the SEC’s new guidelines, I thought it would be worth revisiting the key provisions of Amendment 12.

The events of Aug. 24, 2015, were a wake-up call for many in the exchange-traded fund (ETF) industry. After a market selloff in Asia spread to North America on that day, a flash crash ensued — creating upheaval in the US equity markets.

In addition to widespread market volatility, ETFs were hurt by diminished liquidity and price dislocation. This was due in part to the breakdown of trading mechanisms that were designed to prevent volatility.

Changes Designed to Stem Market Volatility

Within a year, the Securities and Exchange Commission (SEC) enacted several changes designed to stem market volatility, including abolishing its controversial Rule 48 — a mechanism designed to ensure orderly trading, but one that created its own set of problems.

Left unresolved were harmonization between exchanges and the shortcomings of “limit-up/limit-down” rules. These rules were originally intended to put the brakes on extraordinary market volatility by halting trading in a security. But they occasionally do the reverse by reducing price visibility and preventing a security from recovering after a sharp price drop.

These issues are now being addressed. On Jan. 19, the SEC moved to amend its circuit breaker rules — formally known as The National Market System Plan to Address Extraordinary Market Volatility — by adopting what’s known as Amendment 12.

What is Amendment 12?

Amendment 12 establishes guidelines for reopening trading in securities following a limit-up/limit-down pause.

Related: Are High Yield Treasury Bonds to Risky? 

Here are the three key provisions:

Following a trading pause, no equity exchange can reopen trading in a security until after the primary listing exchange reopens trading in that security.