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Flash crash prompts circuit breaker roll-out

19 May 2010  |  8567 views  |  0 STOP

The Securities and Exchange Commission (SEC) has called for uniform circuit breakers on all S&P 500 stocks in response to the "flash crash" that caused mayhem earlier this month.

Under the proposed rules, which are subject to Commission approval following the completion of a comment period, trading in a stock would pause across US equity markets for five minutes if its price changes by more than 10%.

The pause rules, which will be piloted for six months from June, will give the markets a chance to attract new trading interest in the stock, establish a reasonable market price and resume trading in a "fair and orderly fashion", says the SEC.

The plan - which has the backing of the national securities exchanges and Finra - comes after tthe so-called "flash crash" on 6 May, which saw the Dow Jones industrial average plummet in minutes, with 30 stocks in the S&P falling at least 10%.

Mary Schapiro, chairman, SEC, says: "We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges. As such, I believe it is important that all the exchanges quickly reached consensus on a set of uniform circuit breakers that would be triggered when needed."

In a statement welcoming the rules, Nyse Euronext says: "The adoption of this market-wide mechanism will promote investor protection and is designed to help prevent similar events from taking place in the future. This result is a meaningful step towards re-affirming the integrity of, and confidence in, America 's capital market system."

Although the SEC says the plunge was compounded by a lack of consistency, it has still not identified the underlying cause.

A joint report, carried out in partnership with the US Commodity Futures Trading Commission (CFTC), suggest a "severe mismatch in liquidity" played a part.

However, it "found no evidence that these events were triggered by "fat finger" errors, computer hacking, or terrorist activity, although we cannot completely rule out these possibilities."

Meanwhile, CME Group has carried out its own investigation into the crash, concluding that high-frequency traders were not, as has been suggested, responsible.

CME Group says "there is no visible support of the notion that algorithmic trading models deployed in the context of stock index futures traded on CME Group exchanges caused the market fluctuations in question".

In fact the operator goes further, claiming "automated trading contributes to market efficiencies, generally bolsters liquidity and thereby contributes to the price discovery function served by futures markets".

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