Limits on how far down or up stocks can move in a five-minute period start to take effect today.
First up: “Tier 1” stocks in the Standard & Poor’s 500 Index and the Russell 1000 Index, as well as certain exchange-traded products. All National Market System stocks in this tier will be subject to bands on how far their prices can move over short periods of time, by approximately July 8.
Next up: The remainder of NMS stocks. The phase-in of all other stocks and relevant exchange-traded products will begin on or about October 8.
Securities information processors will disseminate the price bands between 9:45 a.m. and 3:30 p.m. on each trading day. Exchanges conducted tests of their systems over the weekend.
The price bands were originally set to roll in on February 4. The Financial Industry Regulatory Authority asked for an extension to April 8.
Also coming into effect now are market-wide circuit breakers.
The price bands and market-wide circuit breaker changes are responses to the Flash Crash of May 6, 2010.
The individual stock limits will apply to all over-the-counter transactions involving an exchange-listed security reported through a FINRA system.
The limits on stocks in the Standard & Poor’s 500 Index, the Russell 1000 Index, and certain exchange-traded products will be 5 percent above or below the average price of the previous five-minute period. For other listed securities, the price band would be 10 percent above or blow.
Broader price bands will apply to securities priced $3 per share or less.
The new market-wide circuit breaker rules update the existing rules by reducing the market decline percentage that triggers a halt in trading to 7, 13 or 20 percent from the prior day’s closing price, rather than declines of 10, 20, or 30 percent.
The benchmark for the drops now will be the Standard & Poor’s 500 Index, rather than the Dow Jones Industrial Average.
There will be only two relevant periods: Before and after 3:25 p.m.
If a threshold is tripped before 3:25 p.m., trading will halt for 15 minutes. If a 20 percent drop occurs, trading will stop for the day.
FINRA said existing rules also put a 3 percent threshold on stocks over $50. Meaning: a stock priced at $100 that drops to $96 would break the 3 percent threshold and be deemed “erroneous.”
If trading in a stock does not correct itself with 15 seconds, then the primary listing market for the security will declare a five-minute trading pause.
Last week, the New York Stock Exchange and sister market NYSE MKT Tuesday filed plans with the SEC to shut down their Liquidity Replenishment Point programs, a set of price bands that are designed to curb the kind of volatility most visibly seen in the May 6, 2010 flash crash.
The shut-down of individual exchanges’ anti-volatility programs was part of the SEC plan to create unified curbs.
