SEC proposes new process for breaking erroneous trades

Under the current rules, exchanges can choose the specific percentage threshold away from the reference price where trades are broken. There isn't a clearly defined standard used for breaking erroneous trade.

"Establishing clear and transparent standards for breaking trades helps provide certainty in advance as to which trades will be broken, and allows market participants to better manage their risks," said SEC Chairman Mary Schapiro.

Last week, the SEC approved a plan to create stock-by-stock circuit-breakers that call for pausing trading when stocks fluctuate too much. That circuit-breaker went into effect nearly a week ago. The SEC is aiming to test out the new rules for breaking trades through a pilot program that would run through Dec. 10, the same timeline as the new circuit-breaker rules. 

The rules will be filed by the various exchanges and the Financial Industry Regulatory Authority.

When stocks are subject to single-stock circuit breakers, trades would be broken at the following levels:

• If stocks are priced at $25 or less, a trade would be broken if trades are 10 percent away from the circuit-breaker trigger price.

• If stocks are priced between $25-$50, trades would be broken if they are 5 percent away from the circuit-breaker trigger price.

• If stocks are priced at $50 or higher, then trades would be broken if they're 3 percent away from the circuit-breaker trigger price.

When circuit breakers don't yet apply, the SEC said that exchanges and the Financial Industry Regulatory Authority would plan to break trades at certain levels.

• For events involving five to 20 stocks, trades would be broken when they are 10 percent away from a reference price.

• Events involving more than 20 stocks, trades would be broken when they're 30 percent away from the reference price.

The SEC is also looking at other issues following the May 6 market plunge, which is still under investigation, including ways to address the risks of stop loss and market orders, ways to deter or prohibit the use of stub quotes, and studying the effect of trading protocols including trading pauses and self-help rules.

An advisory committee of the SEC and Commodity Futures Trading Commission is slated to meet early next week to continue looking into the causes of the May market crash.