SEC Plans To Extend Circuit Breakers To 344 ETFs

July 06, 2010

The SEC’s efforts to protect markets from another 'flash crash' expanded with a plan to include some of the most widely traded ETFs among the securities included in its new trading circuit-breaker program.

The Securities and Exchange Commission announced plans last week to expand the stock-by-stock circuit breaker rules implemented in the wake of the May 6 “Flash Crash” for S&P 500 listings to include 344 ETFs and all the securities listed in the Russell 1000 Index of large-cap stocks.

The expanded circuit breakers will apply to some of the most heavily traded ETFs, including the SPDR S&P 500 ETF (NYSEArca: SPY), the PowerShares QQQ (NasdaqGM: QQQQ), and the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM). The new rules will also cover some leveraged and inverse-leveraged ETFs and a handful of ETNs, the SEC said in a press release.

The circuit breakers will pause trading in individual securities uniformly across the major U.S. markets for a five-minute period in the event that any security experiences a 10 percent price change during the preceding five minutes. The SEC implemented stock breakers last month on all the stocks of the S&P 500 Index, and pledged at the time to include ETFs in the program as soon as possible.

The new rules will also cover some inverse-leveraged ETFs and a handful of exchange-traded notes, or ETNs, the SEC said in a press release. No leveraged ETFs were included in the initial group of securities.

“The proposals would expand the uniform circuit breakers to many more stocks and ETFs,” said SEC Chairman Mary Schapiro in the press release.

Choosing The ETFs

NYSE Euronext, the parent company of the New York Stock Exchange, developed the list of 344 ETFs in consultation with other major exchanges and the Financial Industry Regulatory Authority.

NYSE Euronext winnowed down the universe of U.S. ETFs by excluding products whose average daily trade volume was less than $2 million worth of shares, it said in a press release.

The SEC is also considering steps to deter or prohibit the use of “stub quotes,” the placeholder prices market makers are required to publish, even during market disruptions, that assign minimum and maximum bid and offers.

During the flash crash, many ETFs suffered so-called broken trades when market makers submitted stub quote prices of a penny or less amid a deluge of selling and evaporating liquidity.

The SEC published the proposed expansion of the stock-by-stock circuit breakers on June 30. They would not take effect until at least the 10-day public comment period has elapsed.

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