Nasdaq proposes to extend pilot related to market-wide circuit breaker

Maria Nikolova

Nasdaq proposes to amend Rule 4121 to extend the pilot to the close of business on October 18, 2020.

The Nasdaq Stock Market LLC is proposing rule changes to extend the pilot related to the market-wide circuit breaker. In particular, the changes concern Rule 4121, which provides a methodology for determining when to halt trading in all stocks due to extraordinary market volatility.

The market-wide circuit breaker (MWCB) mechanism under Rule 4121 was approved by the Securities and Exchange Commission (SEC) to operate on a pilot basis, the term of which was to coincide with the pilot period for the Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS (the so-called “LULD Plan”), including any extensions to the pilot period for the LULD Plan. The US regulator has recently approved an amendment to the LULD Plan for it to operate on a permanent basis. Given this, Nasdaq amended Rule 4121 to untie the pilot’s effectiveness from that of the LULD Plan and to extend the pilot’s effectiveness to the close of business on October 18, 2019.

Nasdaq now proposes to amend Rule 4121 to extend the pilot to the close of business on October 18, 2020. The Exchange aims to use the extension to develop rules and procedures that would allow for the periodic testing of the performance of the MWCB mechanism, with industry member participation in such testing. The extension will also permit the exchanges to consider enhancements to the MWCB processes such as modifications to the Level 3 process.

The market-wide circuit breaker under Rule 4121 provides an automatic mechanism that aims to promote stability during periods of significant stress when securities markets experience extreme broad-based declines. All US. equity exchanges and FINRA adopted uniform rules on a pilot basis relating to market-wide circuit breakers in 2012 (MWCB Rules), which intend to slow the effects of extreme price movement through coordinated trading halts across securities markets when severe price declines reach levels that may exhaust market liquidity. Market-wide circuit breakers provide for trading halts in all equities and options markets during a severe market decline as measured by a single-day decline in the S&P 500 Index.

According to Rule 4121, a market-wide trading halt will be triggered if the S&P 500 Index declines in price by specified percentages from the prior day’s closing price of that index.

At present, the triggers are set at three circuit breaker thresholds:

  • 7% (Level 1),
  • 13% (Level 2), and
  • 20% (Level 3).

A market decline which results in a Level 1 or Level 2 halt after 9:30 a.m. ET and before 3:25 p.m. ET would halt market-wide trading for 15 minutes, whereas a similar market decline at or after 3:25 p.m. ET would not halt market-wide trading. A market decline which leads to a Level 3 halt, at any time during the trading day, would halt market-wide trading until the primary listing market opens the next trading day.

The Securities and Exchange Commission (SEC) is soliciting comments on Nasdaq’s proposal. More information on how to submit your comments may be found in the relevant SEC notice.

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