The Securities and Exchange Commission (SEC) has unveiled plans to ditch circuit breakers in favour of a 'limit up-limit down' mechanism for reducing market volatility.
Circuit breakers - which pause trading in stocks if their prices change by more than 10% in five minutes - were introduced in the aftermath of the 6 May flash crash which saw the S&P 500 index plummet.
The SEC says the system has been effective in moderating potentially extraordinary volatility but it has also been triggered by erroneous trades.
A more sophisticated approach, dubbed limit up-limit down, has now been proposed by US exchanges and Finra which means trades in listed stocks would have to be executed within a range tied to recent prices for that security.
For stocks currently subject to the circuit breaker pilot, the percentage range would be five per cent, with others shares set at 10%. The bands would be doubled during the opening and closing periods.
To accommodate more fundamental price moves, there would be a five-minute trading pause - similar to the one triggered by the circuit breakers - if trading is unable to occur within the price band for more than 15 seconds.
Finra and the exchanges are proposing to pilot the system for one year, with it applying to all bourses, ATSs, and broker-dealers executing internally. The SEC is now opening the idea up for a 21-day public comment period before deciding whether to approve it.
Mary Schapiro, chairman, SEC, says: "Upgrading our trading parameters will help our markets retain the confidence of investors and companies. We were focused on improving the structure of our markets before weaknesses were exposed on May 6, and we will continue to be focused on market structure going forward."