The SEC approved rule changes that all the major exchanges had submitted in June, pertaining to:  (i) expanding the pilot rules for trading pauses due to extraordinary market volatility;  (ii) setting forth clearer standards and curtail SRO discretion with respect to breaking erroneous trades.  Here's what's changing.

    SEC Release 34-62886, 9/10 (Breaking Trades).   CURRENT.   Clearly erroneous execution rules currently provide that Exchanges will break trades in Exchange-listed stocks only if the price of the trades exceeds a specified “Reference Price” – usually the consolidated last sale – by an amount that equals or exceeds specified “Numerical Guidelines.”  Those Numerical Guidelines, which vary depending on price of the stock, are:  (i) 10% if consolidated last sale is $25 or less;  (ii) 5% if consolidated last sale is in the range, $25.01 to $50.00;  (iii) 3% if consolidated last sale is over $50.  These percentages double during pre-open and post-close trading sessions, and will change in the event that five or more securities are involved. 

While the current rules do not give the Exchanges discretion to break trades that don't exceed the Numerical Guidelines, they do permit the Exchanges discretion to select a percentage threshold at which trades will be broken that's higher than the Numerical Guidelines.  On May 6, the Exchanges selected 60% as the threshold for breaking trades in a process that, from the perspective of market participants, was not clear or transparent, and led to further uncertainty and confusion in the market.

    AS PROPOSED.   Exchanges no longer will have discretion to deviate from the specified percentage threshold at which trades will be broken in many situations, including those where the single-stock circuit breakers are applicable and in other larger “Multi-Stock Events” involving 5 or more securities - the rule explains how a Multi-Stock Event is determined. 

When an individual stock trading pause is triggered, transactions could occur before the trading pause is fully implemented on all of Exchanges and in the OTC market.  In such event, the Exchanges will review, on their own motion, all transactions triggering an individual stock trading pause and subsequent transactions that may occur before the trading pause is in effect.  They would use the price that triggered the trading pause (the “Trading Pause Trigger Price”) as the Reference Price and break trades that are 10% or more away from the Reference Price for stocks priced $25 or less, 5% or more away from the Reference Price for stocks priced from $25 to $50, and 3% or more away from the Reference Price for stocks priced more than $50.

    EXCHANGE TRADED PRODUCTS.   When dealing with a leveraged ETF or ETN (note), these percentage thresholds would be multiplied by the leverage multiplier.  For situations in which a stock is not subject to an individual stock trading pause (e.g., because the stock is not in the circuit breaker pilot program, or when the stock is part of the pilot program but the circuit breaker does not apply because it is the beginning or end of the day), the trade break rules will differ based on the number of stocks involved.  .......

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