May 19, 2010

Co-Authors

Justin Schack

Director

Joe Gawronski

President and COO

Rosenblatt Securities Inc.
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Flash Crash Fallout: New Circuit Breakers Coming

Last week we offered our thoughts on the significance of the May 6 “flash crash” and potential responses to it. The Securities and Exchange Commission, exchanges and others have since then been discussing ways to prevent similar episodes in the future, and the exchanges filed rules last night seeking to establish coordinated single-stock circuit breakers. In this brief piece we lay out how the new breakers will work, how often they may be triggered and what effects they might have on market structure and trading. 

How the New Breakers Will Work

In essence, the proposals call for new circuit breakers that trigger market-wide trading halts in single stocks. There also had been talk of changing the broader-marketcircuit breakers, which today halt all US stock trading once certain declines in the value of the Dow Jones Industrial Average are reached, so that they are triggered instead by smaller moves in the Standard & Poor’s 500 index. And some discussion took place regarding circuit breakers for certain ETFs. But both of those potential measures are off the table for now, pending further review.