June 4, 2012

SEC: New Rules to Dampen Stock Market Volatility by Feb 4 2013

National Securities Exchanges, FINRA, SEC: New rules to dampen stock market volatility by Feb 4 2013.

The new rules - 

Rule #1. Limit-up, Limit-down mechanism – specify a price band for trading of individual stocks.

  • Price band reference = Average price of stock in the preceding 5-minute period
  • Price band % =
    • 5% for liquid securities (those in S&P 500, Russell 1000, certain exchange-traded products)
    • 10% for other securities
    • Percentage is 2x during opening, closing periods
    • For securities < $3, price band % will be more

Rule #2. Market-wide trading halt – Set new thresholds for market-wide trading halt & for trading halt duration.

  • Percentage declines that will trigger a trading halt – 7, 13, 20% decline from previous days closing price.
  • Trading halt duration = 15 minutes (except those halts at the end of the trading day)
  • Only two trigger periods – Before 3:25 pm, 3:25 pm or later
  • Price reference for market decline - ^GSPC
  • Trigger thresholds calculated daily 

The proposals will be implemented by all major exchanges by Feb 4, 2013.

The compliance to the proposals appears to be on an “honor” system.

The new rules seem like applying a small band-aid to a complex system. Watch the HFT traders figure out new ways to workaround the system.

The major exchanges - BATS, CBOE, EDGA, EDGX, NASDAQ, NSE, NYSE, ARCA etc.

Tags: sec proposal for volatility, finra proposal to dampen volatility, new market volatility rules, limit-up limit-down rule, market-wide trading halt thresholds, stock market volatility rule