WASHINGTON — In an attempt to prevent a repeat of this month’s rapid market plunge, the Securities and Exchange Commission on Tuesday proposed a new circuit- breaker mechanism that briefly would halt trading in individual stocks that experience a 10 percent price change over a five-minute period.
The proposal would enact a five-minute trading pause for stocks in the Standard & Poor’s 500 index. If the commission approves the circuit breaker as expected, following a 10-day public comment period, the new rules would be in place on a pilot basis until Dec. 10.
The SEC said it hopes to use that time to make adjustments to the mechanism and to expand it to other stocks, including exchange-traded funds, “as soon as practicable.”
The move was agreed to by the leaders of six major financial exchanges during a meeting last week with SEC Chairman Mary Schapiro following the May 6 market nosedive.
The Dow Jones industrial average plummeted 700 points in 15 minutes that day.
The New York Stock Exchange enacted circuit breakers after a major market crash in 1987. But those are based on movement of the Dow Jones industrial average, not individual stocks, and enact a marketwide trading halt. The halt kicks in only after the Dow drops at least 10 percent before 2:30 p.m. EDT.
The May 6 plunge happened later in the day, making those circuit breakers useless.
“I believe that circuit breakers for individual securities across the exchanges would help to limit significant volatility,” Schapiro said Tuesday. “They would also increase market transparency, bolster investor protection and bring uniformity to decisions regarding trading halts in individual securities.”
