In general, the new rules allow an exchange to consider breaking a stock trade only if the price exceeds the consolidated last sale price by more than a specified percentage amount.
The Securities and Exchange Commission announced that it has approved new exchange rules for breaking stock trades that deviate so substantially from current market prices that they are considered “clearly erroneous.” The rules would for the first time provide a consistent standard across stock exchanges and reduce uncertainty about what happens to a trade depending on where it is executed.
“Adopting consistent standards across exchanges for breaking trades will strengthen the resiliency of our markets by reducing the potential for market confusion, especially during periods of high market volatility,” said SEC Chairman Mary L. Schapiro. “These changes will promote the orderly and efficient operation of our markets.”
Clearly erroneous trades can result from a variety of causes, including human error or computer malfunction. Because the markets today are so fast, automated and interconnected, an erroneous trade in one market can very rapidly trigger a wave of similarly erroneous trades in other markets. For example, if the last trade in a stock is $20 and a computer malfunction at one firm causes a series of trades to occur on multiple exchanges at prices exceeding $50, the automated systems of other firms may quickly follow, with erroneous trades rapidly impacting multiple markets and market participants.
In general, the new rules allow an exchange to consider breaking a trade only if the price exceeds the consolidated last sale price by more than a specified percentage amount: 10 per cent for stocks priced under $25; 5 per cent for stocks priced between $25 and $50; and 3 per cent for stocks priced over $50. In addition, the erroneous trade review process generally must commence within 30 minutes of the trade and be resolved within 30 minutes thereafter.
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