Wall Street to have new circuit breakers

The US market regulators have proposed new restrictions to rein in volatility of individual stocks, a move that comes after the Wall Street crashed due to severe volatility in the shares of certain companies on May 6.

Looking to tame the possibility of intense volatility, the new rules would ensure that trading in certain individual stocks are paused, "if the price moves 10 per cent or more in a five-minute period".

The new circuit breaker rules have been proposed by the Securities and Exchange Commission, National Securities Exchanges and the Financial Industry Regulatory Authority.

On May 6, the benchmark Dow Jones Industrial Average plummeted about 1,000 points for a few minutes, but recovered most of the losses before ending the day with over one per cent loss at 10,520.32 points.

Market regulator SEC in a statement on Tuesday said the trading in a stock would pause across the equity markets for a five-minute period in the event that the stock experiences a 10 per cent change in price over the preceding five minutes.

"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. Initially, these new rules would be in effect on a pilot basis through December 10, 2010," it said.

The markets would utilise the pilot period to make necessary adjustments to the parameters or operation of the proposed circuit breakers. These rules were decided upon, after a meeting of SEC, exchanges and FINRA last week.

"The meeting took place within days after the market dropped massively after the S&P 500 index fell at least 10 per cent in a five-minute period," the statement said.

Going by reports, the market crash on May 6 was due to some technical glitches even though the exact reason is yet to be ascertained.

SEC chairperson Mary Schapiro said the circuit breakers for individual stocks 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," she added.

Welcoming the move, NYSE Euronext in said the adoption of this market-wide mechanism would promote investor protection and help prevent similar events in the future.