SEC Proposes Limit Up/Limit Down

Last night, the SEC unveiled its proposed revision to the single stock circuit breakers put in place last year in response to the May 6 “Flash Crash.”  The new proposal calls for a “limit up/limit down” provision rather than an actual halt in trading.  Limit up/limit down is essentially a price band which prohibits trading outside a certain range for a period of time.  In this case, the band would go into effect if a stock traded more than 5% away from the average price over the last 5 minutes.  When triggered, trades can happen at the last sale or better, but cannot move the stock price further away from the average price.  If no trading occurs within the price band for more than 15 seconds, then a 5 minute trading pause would be enacted. 

According to the FT, the circuit breakers that have been piloted for the last year were widely criticized for interfering with natural market corrections and for halting a stock over erroneous trades, many of which were later cancelled anyway.  The new proposal seeks to limit interference in trading (i.e. pauses) to real dislocations and according to SEC Chairman Schapiro, “help our markets retain the confidence of investors and companies.”

The Limit Up/Limit Down proposal is currently up for a 21 day comment period and would operate as a pilot program for one year.  For companies that were in the existing circuit breaker pilot (S&P 500 and Russell 1000 constituents), the new proposal triggers the price band at 5% away from the average price over the last 5 minutes.  For all other stocks, the band would be triggered at 10%.  The bands for both groups would be doubled during opening and closing periods and both are subject to a 5 minute halt if no trading takes place within 15 seconds of the price band implementation. 

You can read the whole proposal here or reach out to your NYSE rep with questions.