UPDATE: SEC Expands Circuit Breaker To Cover All US Stocks

The Securities and Exchange Commission approved a massive expansion of safeguards aimed at preventing another "flash crash," allowing exchanges to implement a so-called "circuit-breaker" for every U.S. stock.

U.S. stock exchanges intend by August 8 to implement temporary trading halts for rapidly moving securities not already covered in the regime of such circuit breakers, put in place a year ago to ward off the dramatic price swings of the May 6, 2010, "flash crash."

Exchanges and regulators currently are debating the format for a new and more flexible system of "limits" geared to replace the circuit breakers, but broadening the existing plan will afford protection to more stocks while the new scheme is finalized.

The circuit breaker function briefly pauses trading in a particular stock or exchange-traded fund if its price rises or falls by 10% or more within a five-minute period. Currently covered by the pilot program are stocks in the Standard & Poor's 500 and Russell 1000 stock indexes, as well as 344 of the most heavily traded ETFs.

The expansion, approved Thursday according to a notice from the SEC, encompasses all securities listed on U.S. trading venues but will allow for wider price swings before halting lower-priced or thinly traded shares that typically are more volatile.

Exchange operators NYSE Euronext (NYX), Nasdaq OMX Group Inc. (NDAQ), BATS Global Markets and Direct Edge backed the program's extension, alongside smaller exchanges and the Financial Industry Regulatory Authority Inc.

Under the plan, stocks and exchange-traded funds priced at or above $1 would be halted after a move of 30% or more in a five-minute period. Securities priced below $1 would trigger a halt after rising or falling by 50% or more in a five-minute period.

Alongside the circuit breakers, U.S. market authorities have settled on firmer rules governing when trades should be cancelled and stricter price-quoting guidelines for trading firms, all aimed at warding off another flash crash. The market gyration temporarily wiped about 700 points from the Dow Jones Industrial Average as some share prices plunged as low as one cent.

This week, brokers and exchange officials weighed in on the next step for "flash crash" prevention, a system of price limits similar to those used in futures markets, which would curb rapid price swings but avoid shutting down trade entirely in the overheated security.

Stock exchange operators have backed the concept as a more elegant solution than the existing circuit breakers, but warnings emerged this week that the new plan could create new issues.

Adding the limits to existing methods for mitigating volatility at exchanges could create a tangle of starts and stops in particular stocks, potentially "creating a great deal of confusion and uncertainty," wrote Knight Capital Group (KCG) General Counsel Leonard Amoruso in a letter sent to regulators this week.

Futures exchange operator CME Group Inc. (CME) and the Securities Industry and Financial Markets Association both warned in separate letters this week that temporarily limiting the movements of some securities could make it harder for traders to accurately value indexes that contain those securities--prompting firms to stop trading in derivatives linked to such indexes.

Sifma also sought a greater say in the way the new price-limit regime is overseen, asking regulators to create an advisory committee staffed by brokers.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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