By Agency Reporter

WASHINGTON: The Securities and Exchange Commission unveiled a long-awaited plan designed to protect the markets from volatile price swings following the May 6 “flash crash.”

According to a report by Reuters on Wednesday, the so-called “limit up-limit down” proposal, announced by the SEC on Tuesday, would require trades in United States-listed stocks to be executed within a range tied to recent prices.

If approved, it will replace existing single-stock circuit breakers that were implemented through a pilot program shortly after the flash crash.

The circuit breakers halt trading in hundreds of stocks and ETFs when their price moves 10 per cent or more during a rolling five-minute period.

The SEC has been working closely with the exchanges and the Financial Industry Regulatory Authority to come up with market structural fixes to prevent a repeat of the May 6 flash crash, which temporarily wiped out about $1tn in paper value in the stock market.

“Upgrading our trading parameters will help our markets retain the confidence of investors and companies,” said SEC Chairman Mary Schapiro in a statement.

The proposed new limit up-limit down plan, which has been in the pipeline now for awhile, would prevent listed securities from being traded outside of a specific price band.

It is meant to serve as a more sophisticated mechanism for addressing market volatility. Although the circuit breakers have helped, they have also been triggered by erroneous trades.

Most recently, the potential holes in the circuit breaker programme were exposed after 10 new exchange-traded funds suffered their own “mini” flash crash last Thursday.

The new ETFs were not covered by the circuit breakers and some of them fell by as much as 98 per cent.

Nasdaq OMX Group Inc was forced to cancel the trades, and the incident raised concerns that the measures taken by the SEC since the flash crash were not enough to prevent extreme market movements.

Tuesday’s proposed price band for the limit up-limit down proposal would be set at a percentage above and below the average price of the security over the preceding five-minute period, the SEC said.

For stocks that are currently covered by the existing circuit breakers, the plan sets the percentage at five per cent. Other stocks not covered by circuit breakers would be subject to a 10 per cent threshold.

The SEC said these percentage bands would be doubled in the opening and closing periods of the market, and broader bands would apply to stocks if they are valued below a $1.00.

If a stock is unable to trade within the designated price band for more than 15 seconds, a five-minute trading pause would kick in.

Traders on Tuesday had a mixed reaction upon hearing about the SEC’s plan.

Source: Punch