Exam Alert: National exchanges and FINRA to implement new standards for trading halts

Effective February 4, 2013, the national securities exchanges and FINRA will put into place new standards for halting trading both in single stocks and for the whole market. Halts in individual securities will use a “limit up-limit down” mechanism, meaning that it will prevent the security from trading outside of a specified price range based on the average price of the security over the past 5 minutes. Market halts will trigger on smaller drops in the market, and will last for shorter periods of time. Continue reading

Effective February 4, 2013, the national securities exchanges and FINRA will put into place new standards for halting trading both for single stocks and for the whole market.

 

Halts in individual securities will use a “limit up-limit down” mechanism, meaning that it will prevent the security from trading outside of a specified price range based on the average price of the security over the past 5 minutes.  The range is a given percentage above and below that value, as follows:

-For more liquid securities (such as those in the S&P 500) priced above $3, the price range is 5% above and below the average price of the security over the past 5 minutes.

-For other securities priced above $3, the price range is 10% above and below.

-For securities priced between $0.75 and $3, inclusive, the price range is 20% above and below.

-For securities priced under $0.75, the price range is the lesser of $0.15 or 75% above and below.

These percentages will be doubled during the first 15 minutes of trading and the last 25 minutes of trading.  Whenever a security cannot trade within the specified price range for over 15 seconds, trading in the security will be paused for 5 minutes.

 

Market halts will trigger on smaller drops in the market, and will last for shorter periods of time.  The new market halts will trigger at the following thresholds, with the following effects:

-Level 1 Halt: triggers on a 7% drop, will halt trading for 15 minutes if it occurs before 3:25 PM (there is no effect if it triggers after 3:25 PM).

-Level 2 Halt: triggers on a 13% drop, will halt trading for 15 minutes if it occurs before 3:25 PM (there is no effect if it triggers after 3:25 PM).

-Level 3 Halt: triggers on a 20% drop, will halt trading for the rest of the day (regardless of when it occurs).

In addition, market halts will reference the S&P 500 as the pricing reference for determining market declines and the trigger thresholds will be recalculated daily.  (The current rules reference the Dow Jones Industrial Average and recalculate the thresholds monthly.)

 

Sources:

SEC Approves Proposals to Address Extraordinary Volatility in Individual Stocks and Broader Stock Market (SEC Release 2012-107)

SEC Approves Market-Wide & Single-Stock Circuit Breakers (Securities Technology Monitor)

Further reading (details current rules and gives reasoning for the limit up-limit down mechanism):

Circuit Breakers and Other Market Volatility Procedures (SEC)

 

This alert applies to the Series 55, Series 62, Series 24, and Series 7.

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