U.S. financial regulators are contemplating the introduction of individual stock circuit breakers in response to the market disruption that took place on May 6.

The U.S. Securities and Exchange Commission announced Tuesday that the national securities exchanges and the Financial Industry Regulatory Authority are filing proposed rules that would pause trading in certain individual stocks for five minutes if the price moves 10% or more in a five-minute period.

“The pause would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion,” the SEC said.

The SEC said that the proposed rules “reflect a consensus” that was achieved among the exchanges, FINRA and the SEC after they met to discuss the extreme volatility in the markets that day.

“We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges,” said SEC chairman, Mary Schapiro. “As such, I believe it is important that all the exchanges quickly reached consensus on a set of uniform circuit breakers that would be triggered when needed.”

Initially, these new rules would be in effect on a pilot basis through Dec. 10, during which time, markets will evaluate, and possibly adjust, the parameters or operation of the circuit breaker based on their experience. Also, the circuit breaker will be expanded to securities beyond the S&P 500 (including ETFs) as soon as practicable, it said.

“I believe that circuit breakers for individual securities across the exchanges would help to limit significant volatility. They would also increase market transparency, bolster investor protection, and bring uniformity to decisions regarding trading halts in individual securities,” said Schapiro.

During the pilot period, Schapiro has also asked the SEC staff to consider ways to address the risks of market orders and their potential to contribute to sudden price moves, as well as to consider steps to deter or prohibit the use by market makers of “stub” quotes, which are not intended to indicate actual trading interest. SEC staff will study the impact of other trading protocols at the exchanges, including the use of trading pauses and self-help rules, and they will continue to work with the exchanges and FINRA to improve the process for breaking erroneous trades, by assuring speed and consistency across markets. The SEC staff is also working with the markets to consider recalibrating market-wide circuit breakers, none of which were triggered on May 6.

IE