Placing More Sparks on Single Stock Circuit Breakers

After the market events of May 6, 2010 that briefly wiped out $862 billion in equity shares before the market recovered, the SEC and CFTC established a Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues to develop recommendations on emerging and ongoing issues of mutual concern to both agencies. The committee is composed of eight members, including Nobel Prize winning Joseph E. Stiglitz; former CFTC chairman, Brooksley E. Born; and former SEC chairman, David Ruder.

The eight-member committee recently advised the SEC in a report, presented during a February 18, 2011 meeting, on various issues including the use of market circuit breakers, restrictions on co-location and direct access, and liquidity enhancement issues.

In the report, the Committee concurred with the steps the SEC has taken to: 1. Create single stock circuit breakers (triggered if the price of a security changes by 10 percent or more within a five-minute period) 2. Establish rules providing clarity as to which trades will be broken when there are multi-stock aberrant price movements, and 3. Implementing minimum quoting requirements to eliminate the ability of market makers to employ “sub quotes.”

However, the Committee stated concerns with the limited applicability of the circuit breakers. The Committee stressed the need for stock specific market “pauses” to be expanded to all but the most inactively traded listed equity securities and ETFs and related derivatives. Specifically, the Committee recommended that the “Commissions require that the pause rules for the exchanges and FINRA be expanded to cover all but the most inactively traded listed equity securities, ETFs, and options and single stock futures on those securities.” The concerns stem from the current length of the “pauses”, which the Committee thinks are unnecessarily lengthy and may, inadvertently, add to the potential market uncertainty.

In a letter addressed to CFTC and SEC, the Committee emphasized that the recommendations are “advisory in nature” – leaving the question open as to how seriously the SEC and CFTC will take the recommendations.

To read more about the Joint Committee’s recommendations and the February 18, 2011 meeting, please visit the SEC’s website