ETFs Now In SEC Circuit Breaker Program

September 13, 2010

The SEC expands its response to prevent another flash crash to include hundreds of ETFs in its circuit breaker program.

The Securities and Exchange Commission, continuing to take steps aimed at preventing another "flash crash," expanded the circuit breaker program it implemented in June to include all the stocks in the Russell 1000 large-cap index and almost 350 exchange-traded funds. The SEC also fine-tuned rules under which so-called erroneous trades would be canceled.

The expanded circuit breakers and erroneous trade rules were developed in response to the market disruption of May 6, when the Dow Jones industrial average plummeted nearly 1,000 points and retraced two-thirds of its losses in less than 30 minutes. The episode, which has still not been definitively explained, rattled investors and undermined faith in current market structures.

The expanded circuit breaker rules 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.

“These circuit breakers and this more objective guidance on breaking erroneous trades will help our markets retain the confidence of investors and companies," SEC Chairman Mary L. Schapiro said in the press release. "We have worked quickly with the exchanges to take these steps, and we will continue to be very focused on addressing weaknesses exposed on May 6."

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 pause gives markets an opportunity to attract new trading interest in an affected security, establish a reasonable market price and resume trading in a fair and orderly fashion. The circuit breaker program and the erroneous trade rules will be in effect on a pilot basis through Dec. 10. The markets will continue to use the pilot period to make any necessary changes, the SEC said in the press release.

A list of the securities included in the Russell 1000 Index, which was rebalanced on June 25, is available on the Russell website. The list of ETFs included in the pilot is available on the SEC's Web site. The SEC anticipates that the exchanges and Financial Industry Regulatory Authority (FINRA) will begin implementing the expanded circuit breaker program the week of Sept. 13.

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