Expansion of Circuit Breaker Pilot Begins August 8th

Just a reminder that the current circuit breaker pilot program is scheduled to be extended effective Monday, August 8 to cover all NMS stocks, including the remaining ETPs which were not in the original phase of the pilot. It’s important to note that this extension of the circuit breaker pilot program is separate from the limit up/limit down mechanism which is currently under consideration by the SEC. Recall that we wrote about the limit up/limit down proposal earlier in the spring here.

It’s not yet clear when or if the limit up/limit down proposal will be approved by the SEC. However, it can be expected that if it is approved, the circuit breaker program will be discontinued.

As a refresher, let’s go over some more background on the circuit breaker pilot program:

Following the events of May 6, 2010, the national securities exchanges worked with the SEC to create a plan to address concerns with extraordinary market volatility.

On June 10, 2010, the SEC approved a circuit breaker pilot program for all securities within the S&P 500 index to end on December 10, 2010. The circuit breaker pilot dictates that a five minute pause in trading be triggered whenever a stock experiences a 10% deviation in price from the previous 5 minutes. Following the 5 minute pause, there is an auction on the primary market to determine the new price of the security.

On June 30, 2010, NYSE Arca in conjunction with other US exchanges proposed to add certain exchange traded products (ETPs) as well as securities within the Russell 1000 index to the pilot program. This was approved on September 10, 2010 by the SEC, and the ETPs were rolled into the program over the course of 2 weeks beginning September 14.

On June 23, 2011, the SEC approved the proposal by the US exchanges to extend the pilot program to cover all NMS stocks, including the ETPs which were not in the original phase of the pilot. This is the extension that will be effective on Monday. These securities will be subject to different price bands than those in the previous phases, with the price move for a trading pause needing to be 30% or more for securities priced at a $1 or higher, and 50% or more for those priced lower than $1. The exchanges and FINRA believe that this larger range is warranted for these securities, as they tend to be less liquid, have lower trading volumes or have characteristics such as being leveraged in nature.

It should be noted that over the course of this circuit breaker pilot program to date, no ETP included in the program has triggered a trading pause.

For more details, click on this link.