The U.S. Securities and Exchange Commission approved rules that will halt trading in Standard & Poor's 500 Index stocks during periods of volatility, a response to the May 6 plunge that wiped out $862 billion in 20 minutes.
The circuit-breaker test, scheduled to last through Dec. 10, will pause trading for five minutes when a company rises or falls 10 percent in five minutes or less. The
New York Stock Exchange said it will begin implementing the curbs tomorrow. The regulator delayed the start of the pilot program last week.
Halts “will help reduce the likelihood of this type of unusual trading activity from recurring,” SEC Chairman Mary Schapiro said on June 2. The circuit breakers have been agreed to by executives from the
New York Stock Exchange, Nasdaq Stock Market and other venues.
NYSE Euronext said five stocks -- EOG Resources Inc., Genuine Parts Co., Harley-Davidson Inc., Ryder System Inc. and Zimmer Holdings Inc. -- will be covered by the halts tomorrow, according to a statement on its website. The rest of the S&P 500 companies it lists will be subject to the rules by June 16, NYSE spokesman Ray Pellecchia said in an interview.
Nasdaq OMX Group Inc. will activate the program on June 14, spokesman Robert Madden said in an e-mailed statement.
The SEC has posted more than 25 letters commenting on the plan on its website. Investors and a former chief economist at the agency said regulators should guard against a repeat of the May 6 selloff by imposing limits on how far shares can fall instead of halting trading. Hudson River Trading LLC, Quantlab Financial LLC,
Credit Suisse Group AG and Lawrence Harris recommended a system used on futures markets such as the Chicago Mercantile Exchange that subject rapidly falling securities to what are known as limit-down restrictions.
“Halts will attenuate volatility if liquidity or rationality arrives before markets return to operation,” wrote Harris, now a finance professor at the University of Southern California in Los Angeles. “Allowing markets to reverse as soon as they are ready to do so is optimal because such reversals restore confidence.”
A limit-down rule preventing executions below a certain level may “minimize the costs associated with interrupting continuous trading and denying market participants a continuous flow of market data during critical time periods,” New York- based Hudson River and Quantlab in Houston told the SEC yesterday. Executives at Chicago-based Allston Trading LLC and RGM Advisors LLC in Austin, Texas, also signed the letter. The firms are automated trading companies.
Creating price boundaries during times of volatility would prevent transactions from occurring “outside of the acceptable range, and ‘clearly erroneous' trades would become a thing of the past,” Dan Mathisson, the New York-based head of the Advanced Execution Services unit at
Credit Suisse, told the SEC in a June 3 letter. Such rules “have been effective in curtailing severe errors or market dislocations” in futures trading, he said.
