On May 6, 2010, the stock market experienced an unusual amount of volatility that has become known as the “flash crash”. One of the problems arising out of the flash crash was that the circuit breakers, adopted in 1988, that are designed to pause trading did not trigger even though the NYSE swung over 500 points down and then up in around five minutes.
In order to stave off potential future flash crashes and in an effort to create greater market integrity, the SEC recently announced that FINRA and the national exchanges are proposing amendments to the existing market-wide circuit breakers; those amendments will require SEC approval. The proposal provides for, among other things, a reduction in the level of market decline needed to trigger the circuit breaker, a shortening of the trading pause, and an overall simplification of the circuit breakers.
This proposal is meant to work in conjunction with other measures that the SEC introduced in the wake of the flash crash. Other prophylactic tools include an SEC pilot program that halts individual trading in specific equities during highly volatile periods. Another proposal that FINRA and the exchanges floated provides for a limit-up and a limit-down mechanism that would bar trading in listed equities beyond a specific price range.
The SEC has opened the floor to comment on its latest proposal. Unfortunately, even if the SEC ultimately adopts such mechanisms, we will not know its efficacy until the next flash crash. The time has come, however, for the SEC to take affirmative steps because the markets are becoming more and more volatile and average investors are currently left with little more than the pinch your nose and hope for the best approach.