SEC approves policy to halt trading on S&P 500 stocks during extreme volatility

On May 6, an apparent erroneous trading error caused the Dow Jones index to lose about 1,000 points, or nearly 9-percent of its total value, in about only a half an hours time.

During that time period, $862-billion was lost, with most of the capital being recovered in the next trading day when security values were pushed back up to prices better reflecting fair value.

The free fall was caused by an apparent trading error, that was made by an equities trader who mistakenly entered a “b” (indicating billion) for a futures trade on the Procter and Gamble stock (NYSE:PG), instead of the correct “m” (indicating million) button.

 The error prompted investigations, and today the U.S. Securities and Exchange Commissions (SEC), approved a new policy that is designed to halt trading on the Standard & Poor 500 Index listed stocks who lose or gain more than 10-percent of their value in a span of up to five minutes.

SEC Chairman Mary Schapiro said the new policy would “help reduce the likelihood of unusual trading activity from occurring”.

The New York Stock exchange is set to implement the new policy in its information systems starting for tomorrow’s trading day.

These restrictions, called limit-down or limit-up policies, are already in use on futures trading on major exchanges, including the Chicago Mercantile Exchange, which is the biggest futures trading exchange in the world.

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Peggy holds a Bachelor Arts degree with honors in Economics from York University in Toronto, Canada. She is a Certified Management Accountant (CMA). She has also passed Level I of the Chartered Financial Analyst (CFA) Program. She is also a realtor. Write to [email protected]
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