The Securities Industry and Financial Markets Association has come out in favor of modifying market-wide circuit breaker rules, though the group has put its own spin on a proposal by self-regulatory organizations for the markets.
In a comment letter to the Securities and Exchange Commission on Thursday, Sifma embraced the proposed rules offered by the SROs, offering a few tweaks concerning when orders should be cancelled.
SROs, including the Financial Industry Regulatory Authority and the regulatory arms for the New York Stock Exchange and Nasdaq, have pushed for a modernization of circuit breaker rules. Circuit breakers were put into effect in 1988, but have almost never been triggered, not even during the “flash crash” of May 6, 2010. (The only time they were triggered was on a single day in 1997.)
The proposed new rules would reduce the market decline thresholds from 10, 20, and 30 percent to 7, 13, and 20 percent. They would also shorten the duration of all trading halts to 15 minutes, with the exception of the most extreme cases in which trading would be halted for the remainder of the day.
However, Sifma said the proposed rules should specify the status of orders during a market-wide trading halt. The group suggested that orders pending with a market center at the time of a Level 1 or Level 2 circuit breaker (7 or 13 percent market drop) should remain queued during the halt and subsequently be eligible for execution after trading resumes.
Orders pending when a Level 3 circuit breaker (20 percent market drop) goes into effect should be cancelled, since in that case trading would cease for the remainder of the day, Sifma said.
The industry group said such an approach would avoid client confusion and unnecessary delays in reentering orders during temporary trading halts.
SROs have also asked whether the market-wide circuit breakers should be triggered if a sufficient number of single-stock circuit breakers are triggered. Sifma said that approach would make sense given the difficulty in accurately calculating the S&P 500 Index in certain circumstances.
While Sifma does not believe the proposed rules have to be adopted at the same time as the pending Limit-Up/Limit-Down proposal, the triggering thresholds for the two mechanisms would need to be coordinated, the group said.
Sifma also stressed that changes to circuit breakers would have to be coordinated with options and futures markets.
