The NYSE, Nasdaq, and SEC continue to develop and test circuit breakers that will act as a safety net during times of exorbitant prices changes inthe market as a whole or in the price of individual securities. SEC Rule201 prohibits the shorting of NYSE, Nasdaq, and Amex listed equities ona minus tick or down bid if the price of the security has declined 10 percent or more from the previous day’s close. The short-sale circuit breaker stays in effect once enacted through the end of the following trading day.The NYSE has enacted rules to help restore orderly market conditions during periods of heightened volatility. Rule 80B halts all trading if the S & P 500 falls by 7 percent, 13 percent, or 20 percent in any given day.A level 1 (7 percent ) or level 2 (13 percent) decline occurring between9:30 a.m. and 3:25 p.m. EST will result in a trading halt in all stocks for 15 minutes. In the case of a level 1 or level 2 decline on a day when the market closes early trading will be halted for 15 minutes if the decline occurs between 9:30 a.m. and 12:25 p.m. EST. Once trading resumes after a level one halt trading will not be halted again unless the S & P 500 decline reaches a level 2 or 13 percent decline. Similarly in the case of a level 2 decline trading would not be halted again once resumed until the S & P 500 reached a level 3 or 20 percent decline. A level 3 (20 percent )decline occurring at any time during the day will halt all trading for the rest of the day.Th e base level that regulates Rule 80B is based on the daily closing value of the S & P 500. All orders that are in hand or on the specialist book prior to a market halt will be treated as GTC orders except market on close and limit on close orders, which will be canceled.



Th e SEC has recently approved the use of a Limit Up Limit Down (LULD) rule.Th is rule is designed to ensure that prices of individual securities refl ect fundamental prices based on supply and demand and do not move outside of established parameters based on errors or manipulative actions. Upper and lower trading bands will be established based on the average reference price of the security over the preceding 5 minute period. Th e reference price is the algorithmic mean of all eligible transactions reported during the 5 minute period and does not include  transactions reported at a volume weighted average price (VWAP). If the stock price moves outside of the established bands trading will be paused for 5 minutes if the stock cannot return to the limit price within 15 seconds. During this 15 second period the stock will be subject to a limit state of limit up or limit down.If no trades take place at or inside the limit price the 5 minute trading pause will occur. Once fully implemented the LULD is intended to replace the single stock circuit breaker rule. Tier 1 and tier 2 securities will have trading bands of 5 and 10 percent respectively from 9:45 a.m.–3:35 p.m. EST. To accommodate additional price discovery during the opening and closing of the market those bands will be expanded to 10 and 20 percent respectively from 9:30 a.m.–9:45 a.m. and from 3:35 p.m.–4:00 p.m. Any aggressive orders placed outside of the price band will be re priced by the Nasdaq system to the price band limit price.


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