SEC puts in new ‘circuit breaker’ rules

SEC puts into place new ‘circuit breaker’ rules to prevent repeat of May 6 stock market plunge

Marcy Gordon, AP Business Writer, On Thursday June 10, 2010, 5:44 pm EDT

WASHINGTON (AP) — Federal regulators on Thursday put in place new rules aimed at preventing a repeat of last month’s harrowing “flash crash” in the stock market.

Members of the Securities and Exchange Commission approved the rules, which call for U.S. stock exchanges to briefly halt trading of some stocks that make big swings.

The major exchanges will start putting the trading breaks into effect as early as Friday for six months. The New York Stock Exchange will begin Friday’s trading session with five stocks: EOG Resources Inc., Genuine Parts Co., Harley Davidson Inc., Ryder System Inc. and Zimmer Holdings Inc. The exchange will gradually add other stocks early next week, expecting to reach by Wednesday the full number that will be covered.

The Nasdaq stock market plans to have the new program fully in place on Monday.

The plan for the “circuit breakers” was worked out by the SEC and the major exchanges following the May 6 market plunge, which saw the Dow Jones industrials lose nearly 1,000 points in less than a half-hour.

Under the new rules, trading of any Standard & Poor’s 500 stock that rises or falls 10 percent or more in a five-minute period will be halted for five minutes. The “circuit breakers” would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time. That’s almost the entire trading day. But it leaves out the final 25 minutes before the close — a period that often sees raging price swings, especially in recent weeks as the kind of volatility that marked the 2008 financial crisis returned.

The idea is for the trading pause to draw attention to an affected stock, establish a reasonable market price and resume trading “in a fair and orderly fashion,” the SEC said.

On May 6, about 30 stocks listed in the S&P 500 index fell at least 10 percent within five minutes. The drop briefly wiped out $1 trillion in market value as some stocks traded as low as a penny.

The disruption “illustrated a sudden, but temporary, breakdown in the market’s price-setting function when a number of stocks and (exchange-traded funds) were executed at clearly irrational prices,” SEC Chairman Mary Schapiro said in a statement. “By establishing a set of circuit breakers that uniformly pauses trading in a given security across all venues, these new rules will ensure that all markets pause simultaneously and provide time for buyers and sellers to trade at rational prices.”

Bank Stocks Cede Biggest S&P Weighting to Technology

By Elizabeth Stanton

May 21 (Bloomberg) — Bank stocks lost their position as the biggest industry group in the Standard & Poor’s 500 Index to technology companies after tumbling 31 percent since 2006.

Computer and software makers led by Microsoft Corp. and International Business Machines Corp. accounted for 16.26 percent of the benchmark for large U.S. companies based on yesterday’s closing prices. Financials, led by Bank of America Corp. and JPMorgan Chase & Co., fell to 16.19 percent.

Banks slid the most among 10 industries in the S&P 500 last year and are the worst-performing group so far in 2008, as lower U.S. real-estate prices led to losses on mortgage debt and derivatives approaching $380 billion globally.

“The earnings power of the financial sector has been impaired because of the credit crunch,” said Thomas J. Lee, chief U.S. equity strategist at JPMorgan in New York. “Technology is benefiting from a global economy that’s been expanding, particularly in emerging markets.”

As the S&P 500 has retreated 3.7 percent this year, its financial components have decreased almost 13 percent. Bear Stearns Cos. lost the most, dropping 89 percent as a run on the brokerage firm prompted the Federal Reserve to arrange a March 16 takeover by JPMorgan. The index declined 1.6 percent today.

Financial shares in the index declined almost 21 percent in 2007, their worst year since a 24 percent drop in 1990. They have plunged 31 percent since the end of 2006.