Tighter Circuit Breakers in Equities Markets

October 4, 2011

The stock markets have proposed[1] to tighten the market-wide circuit breakers that halt trading in the equity markets.  The proposals were prompted, in large part, by the May 6, 2010 Flash Crash and were heavily influenced by recommendations of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues.[2]   The proposals would update the market-wide circuit breakers by:

  • Decreasing the circuit breakers to 7%, 13%, and 20% market drops.  Thus, the circuit breakers will halt all trading in stocks when index values fall 7%, 13%, and 20% in a day, rather than 10%, 20%, and 30%, as is the case today.  According to Bloomberg, since October 1987, the proposed 7% thresholds would have been triggered 10 times, including on May 6, 2010 and on five days in October 2008.[3]
  • Using the S&P 500 – not the Dow Jones Industrial Average – as the circuit breaker benchmark.  The proposals note that the S&P 500 represents a broader base of securities against which to measure whether extraordinary market-wide volatility is occurring. 
  • Recalculating the circuit breaker thresholds on a daily – not quarterly – basis.  This change seeks to ensure that the thresholds relate to current market conditions.
  • Allowing trading halts only once per day.  For example, if trading was halted because of a Level 1 decline, trading would not halt again unless a Level 2 decline occurred.  Similarly, if trading was halted because of a Level 2 decline, trading would not halt again unless a Level 3 decline occurred.  
  • Shortening the length of the Level 1 halts, as well as the Level 2 halts that do not close the market, to 15 minutes.
  • Allowing a trading halt up to 3:25 p.m.  Current exchange rules provide that a Level 1 or Level 2 trading halt cannot be triggered after 2:30 p.m. because of potential problems relating to the closing process.  In their proposals, the exchanges noted that even if the May 6, 2010 market decline reached the current Level 1 decline threshold of 10%, a trading halt would not have been triggered under the current rules because the market decline occurred after 2:30 p.m.
  • Addressing how trading will reopen following a Level 1 or Level 2 trading halt.  If the primary market for a security cannot restart trading in the security within 15 minutes after the end of a trading halt, other markets can begin trading in the security.

The futures markets are expected to propose parallel changes to the market-wide circuit breakers that halt trading in the futures markets. 

[1] The proposals of the national securities exchanges and FINRA are available here on the SEC’s website.

[2] See Summary Report of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues, Recommendations Regarding Regulatory Responses to the Market Events of May 6, 2010 (Feb. 18, 2011).  Markets have been halted only once under the current market-wide circuit breakers, on October 27, 1997.    

[3] Nina Mehta, SEC Proposes Cutting Threshold for Marketwide Trading Halts, Bloomberg (Sept. 27, 2011).


If you have questions regarding this newsflash, please contact any of the lawyers listed below or your regular Davis Polk contact.

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Robert L.D. Colby 202 962 7121
Susan C. Ervin 202 962 7141
Annette L. Nazareth 202 962 7075
Lanny A. Schwartz212 450
Jeffrey T. Dinwoodie 202 962 7132
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