US trials curbs to stop Dow plunge repeat

City A.M. Reporter
NEW rules to curb stock trading when markets plunge uncontrollably will go into effect in June for the largest stocks.

The plan has been hastily crafted by the Securities and Exchange Commission and the major US exchanges in response to the unexplained “flash crash” on 6 May that drove the Dow Jones industrial average down some 700 points within minutes.

The new restrictions known as circuit breakers will apply to all stocks in the Standard & Poors 500 index, but exchange-traded funds (ETFs) are excluded. The circuit breaker will halt trading in a stock for five minutes if it fell more than 10 per cent in five minutes. The breakers will act as “speed bumps to help the market adjust quickly to the high levels of volatility,” SEC chairman Mary Schapiro said.

The breakers are set to apply between 9:45am and 3:35pm EST, ending in time for the New York Stock Exchange’s closing auction. The trial period will last six months ending in December.

Circuit breakers that would halt trading across all markets are also being considered. This would give investors time to digest any news and adjust trading strategies.

The new curbs will align US markets more closely to European markets. Circuit breakers at the London Stock Exchange, for example, are based on the liquidity and volatility of individual stocks.

Regulators and the exchanges have been under intense pressure to zero in on what triggered the 6 May meltdown.

● Will halt trading in a stock for five minutes if it fell by more than 10 per cent in five minutes.

● Are set to apply between 9.45am and 3.35pm EST.

● Are being considered across all markets.