The SEC on Thursday approved rules that will halt trading in S&P 500 index stocks during periods of volatility, a response to the May 6 plunge that wiped out $862 billion in 20 minutes.
The circuit-breaker test, scheduled to last through Dec. 10, will pause trading for five minutes when a company’s stock rises or falls 10% in five minutes or less. The SEC said in an e-mailed statement that trading venues and the Financial Industry Regulatory Authority will begin implementing the curbs Friday. The regulator delayed the start of the pilot program last week.
Halts “will help reduce the likelihood of this type of unusual trading activity from recurring,” SEC Chairwoman Mary Schapiro said June 2. Executives from NYSE Euronext, Nasdaq OMX and other venues agreed to the circuit breakers.
The SEC has posted more than 25 letters commenting on the plan on its website. Investors and a former chief economist at the agency said regulators should guard against a repeat of the May 6 sell-off by imposing limits on how far shares can fall instead of halting trading. Hudson River Trading, Quantlab Financial, Credit Suisse Group and Lawrence Harris said in letters that the circuit breakers approved Thursday by the SEC risk making equity plunges worse.
They recommended a system used on futures markets such as the CME Group that subject rapidly falling securities to what are known as limit-down restrictions.