The Securities and Exchange Commission late Wednesday said it plans to expand its circuit-breaker program to include all stocks in the Russell 1000 Index and some exchange-traded funds.

The program, which exchanges first starting following on June 11, calls for a pause in trading in any stock belonging to the Standard & Poor's 500 Index which moves 10% of more in a five-minute period. Each pause lasts five minutes.

The SEC said it is publishing for public comment proposals by the national securities exchanges and FINRA to expand that program to include all stocks in the wider Russell 1000 Index and a set of exchange-traded funds, which will be published by the SEC on its website.

The circuit-breaker program is an attempt to head off another Flash Crash similar to that of May 6, when intraday trading led to a sharp drop in the Dow Jones Industrial Average of nearly 1,000 points.

The pause is designed to re-establish the price of an affected stock in a “fair and orderly fashion.”

Since going into effect, the breaker has been activated, once on June 17 with shares of Washington Post stock and once this week, on Tuesday, with Citigroup stock (See Securities Industry News, "Don’t Break A Sweat, Uptick," June 30, 2010).

The circuit-breaker program is in effect on a pilot basis through Dec. 10, 2010.

A list of the securities included in the Russell 1000 Index, which was rebalanced on June 25, is available on the Russell website. The exchange-traded funds included in the proposal will be available on the SEC's website along with the proposed rule changes under Exhibit 3 to each filing.

"It is my hope to continue to expand the program to additional publicly traded companies," said SEC Chairman Mary L. Schapiro, in a statement.

The SEC staff, she said, is also:

Considering ways to address the risks of different order types and their potential to contribute to sudden price moves.

  • Considering steps to deter or prohibit the use by market makers of "stub" quotes, which are not intended to indicate actual trading interest.
  • Studying the impact of other trading protocols at the exchanges, including the use of trading pauses and self-help rules.
  • Continuing to work with the exchanges and the Financial Industry Regulatory Authority, which oversees broker/ealers, to improve the process for breaking erroneous trades.
  • The SEC staff also is working with the markets to consider recalibrating market-wide circuit breakers currently on the books — none of which was triggered on May 6.

Once the proposals have been published in the Federal Register, interested parties will have 10 days to respond.

Separately, the New York Stock Exchange said it was slightly altering its “collar trigger” levels in a circuit breaker program, which first began in 1998.

This NYSE program sets thresholds at which trading is halted marketwide for single-day declines in the Dow Jones Industrial Average (DJIA).

Circuit-breaker levels are set quarterly as 10, 20 and 30 percent of the DJIA average closing values of the previous month, rounded to the nearest 50 points.

For the third quarter, which begins Thursday:

  • Level 1: A 1,000-point drop in the DJIA before 2 p.m. will halt trading for one hour; for 30 minutes if between 2 p.m. and 2:30 p.m.; and have no effect at 2:30 p.m. or later unless there is a “level 2” halt.
  • Level 2: A 2,050-point drop in the DJIA before 1:00 p.m. will halt trading for two hours; for one hour if between 1:00 p.m. and 2:00 p.m.; and for the remainder of the day if at 2:00 p.m. or later.
  • Level 3: A 3,050-point drop will halt trading for the remainder of the day regardless of when the decline occurs.

The point drops are slightly smaller than what was in effect in the quarter that ended Wednesday. A Level 1 halt, for instance, would have taken place if a 1,050-point drop in the DJIA occurred before 2 p.m.

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