This evening, U.S. securities regulators disclosed details to the highly-anticipated plan to defend the markets against extreme volatility or the kinds of huge price swings observed in last year’s "flash crash." The proposal, dubbed "limit up-limit down" was announced by the Securities and Exchange Commission late Tuesday. Should the plan get approval, it essentially introduces the first shadows of floors and ceilings to the market by requiring trades in U.S.-listed stocks to exist within a price range attached to recent values.
The plan would serve as a replacement of the single-stock circuit breakers instituted via a pilot program in the aftermath of the flash crash. The circuit breakers are designed to discontinue trade of individual stocks when they fall too far too quickly. The current system has several flaws though, occasionally instituting blocks on trades that don’t fit the criteria.
The new plan has been designed to eliminate these sorts of problems though it’s unclear how and how much the increased regulation will affect the market and the ability for investors to make short term profits. Perhaps the biggest concern is whether the system, designed to eliminate the threat of events like the May 6 flash crash, which depleted the stock market by $1 trillion paper dollars, will succeed in its goal.
The SEC, cooperating alongside the exchanges and the Financial Industry Regulatory Authority put the plan in motion some time ago but are only releasing details now. The limit up limit down plan would demand that stocks currently beneath the existing circuit breakers would fluctuate at a 5 percent maximum. Other stocks not covered by circuit breakers would be subject to a 10 percent threshold.
The level of regulation is more severe than expected to the extent that is has the potential to change the nature of the market. If it’s a cause of celebration or for rejection really depends on your relationship to the market. Day traders may be disappointed that their profit margins will be reduced as will investment bankers, but for the larger American people subject to the volatility in their everyday lives and taxes, the program will come as a relief. Still, the majority of the latter groups are not the most vocal about their positions meaning the former may have the chance to reverse the action in the 21-day public comment period to which limit up-limit down is subject.
Likely in an effort to avoid a huge backlash and having to start at square one again, the SEC added that the percentage bands would be widened significantly in the opening and closing periods of the market. The program is also being instituted as a one-year pilot so in the event that it shifts trading patterns too much away from profitability it can be revoked.
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