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SEC moves to expand stock circuit breakers

By Ben Rooney, staff reporter

NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission proposed new rules Tuesday that would pause trading in certain stocks that experience extreme swings.

The move is in response to the brief but historic stock market crash of May 6, in which the Dow Jones industrial average fell nearly 1,000 points, its biggest intra-day drop on record, before the index rebounded within a matter of minutes.

Under the proposed rules, trading in an individual stock would pause across all U.S. stock markets for a five-minute period in the event that the stock experiences a 10% change in price over the preceding five minutes.

The pause, also called a circuit breaker, would give the markets the opportunity to attract new trading interest, establish a reasonable market price, and resume trading of an affected stock in a fair and orderly fashion, according to the SEC.

"I believe that circuit breakers for individual securities across the exchanges would help to limit significant volatility," SEC Chairman Mary Schapiro said in a statement.

The proposal would create uniform, market-wide standards for individual securities in the S&P 500 stock index. In the current system, circuit breakers are triggered under various circumstances depending on which exchange a stock trades on.

The breakers "would also increase market transparency, bolster investor protection, and bring uniformity to decisions regarding trading halts in individual securities," Schapiro said.

She added that the SEC believes the market disruption of May 6 "was exacerbated by disparate trading rules and conventions across the exchanges."

The SEC said about 30 stocks in the S&P 500 (SPX) fell at least 10% in a five-minute period in an event which has become known as the "flash crash."

Last week, the SEC held a meeting with the leaders of the main U.S. stock exchanges, including the New York Stock Exchange and Nasdaq, and the Financial Industry Regulatory Authority, an industry group, to discuss market-wide circuit breakers.

The new rules reflect a "consensus" that was achieved in that meeting, the SEC said.

The new rules, which are subject to Commission approval following the completion of a comment period, will be rolled out as a pilot program running through Dec. 10, 2010. The SEC did not state when the program would start.

The pilot period will give market participants time to make "appropriate adjustments" to the circuit breakers as warranted, the SEC said. The rules could be expanded to include securities beyond the S&P 500, including Exchange Traded Funds, which may also played a role in the flash crash.

While some of the factors that contributed to the crash have come to light, the ultimate cause remains unknown. The SEC announced Monday that it will release preliminary findings from an investigation in to the events that it is conducting with the Commodity Futures Trading Commission.  To top of page

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