The Securities and Exchange Commission has announced that the national securities exchanges and FINRA are filing proposals in a move to revise the current stock market circuit breakers in an effort to address extraordinary volatility in the markets. If implemented, the new circuit breakers will halt all exchange-listed securities trading in the U.S. markets. After the Flash Crash of 2010 and with the proliferation of how much the trading machines dominate the markets now, this needed to be done.
The thresholds will lower the broad market decline percentage triggers, shorten the duration of the trading halts, and also change the reference index. The existing market-wide circuit breakers were originally adopted in October 1988 and have only been triggered on one day in 1997.
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The basic proposals are as follows:
- Lower the market decline percentage thresholds from 10%, 20%, and 30% down to new levels of 7%, 13%, and 20% from the prior day’s closing price.
- The duration of the trading halts that do not close the market for the day would go from 30 minutes, 60 minutes, or 120 minutes down to 15 minutes.
- Rather than six time periods, the only two relevant trigger time periods would be before 3:25 P.P. and on or after 3:25 P.M.
- The new proposal would strip the Dow Jones Industrial Average as the reference index and would change to the S&P 500 Index as the pricing reference.
Normally, we might not support changes of this magnitude. Our concern is that the Flash Crash of 2010 was damaging enough that some measures needed to be reviewed. More importantly than that, some estimate that trading machines, the computer to computer trading, now accounts for up to 75% of the trading in the liquid stocks out there. That figure varies wildly depending upon the day, but all you have to do is read what we wrote about the dangers of nanonsecond trading.
Imagine if the machines actually dumped 1 billion trades upon the market in one second. A stretch, yes. Theoretically possible, yes. If you do not trust our notion on this matter, remember this: a survey on Wall Street noted that high-frequency trading (HFT) is mostly bad for everyone except the HFTs themselves.
A public comment period will take place but here are the full proposals from the SEC site.
JON C. OGG