Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, April 6, 2011

SEC Announces Filing of Limit Up-Limit Down Proposal to Address Extraordinary Market Volatility

The SEC announced that national securities exchanges and the Financial Industry Regulatory Authority (FINRA) today filed a proposal to establish a new “limit up-limit down” mechanism to address extraordinary market volatility in U.S. equity markets.  Under the proposal, trades in listed stocks would have to be executed within a range tied to recent prices for that security.  If approved by the Commission, the new limit up-limit down mechanism would replace the existing single stock circuit breakers, which were approved on a pilot basis shortly after the market events of May 6, 2010.

The SEC will seek comment on the proposed plan, which is subject to Commission approval following a 21-day public comment period.

The proposed “Limit Up-Limit Down” mechanism would prevent trades in listed equity securities from occurring outside of a specified price band, which would be set at a percentage level above and below the average price of the security over the immediately preceding five-minute period. For stocks currently subject to the circuit breaker pilot, the percentage would be 5 percent, and for those not subject to the pilot, the percentage would be 10 percent.

The percentage bands would be doubled during the opening and closing periods, and broader price bands would apply to stocks priced below $1.00. To accommodate more fundamental price moves, there would be a five-minute trading pause – similar to the pause triggered by the current circuit breakers – if trading is unable to occur within the price band for more than 15 seconds.

If approved, all trading centers, including exchanges, ATSs, and broker-dealers executing internally, would have to establish policies and procedures reasonably designed to prevent trades from occurring outside the applicable price bands, to honor any trading pause, and to otherwise comply with the procedures set forth in the plan. The exchanges and FINRA have requested that the SEC approve the plan as a one-year pilot program.

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