SEC approves NYSE proposal to require certain members to take part in circuit breaker testing

Maria Nikolova

The rule would provide the Exchange with authority to require participation by certain member organizations in industry-wide tests to validate that their processing in the event of MWCB is as expected within their systems.

The United States Securities and Exchange Commission (SEC) on Monday, August 13, 2018, approved a proposed rule change by New York Stock Exchange LLC that would require certain member organizations to participate in scheduled market-wide circuit breaker (MWCB) testing.

The securities and futures exchanges have procedures for coordinated cross-market trading halts if a market price decline reaches levels that may exhaust market liquidity. These procedures, known as market-wide circuit breakers, may stop trading temporarily or, under extreme circumstances, close the markets before the normal close of the trading session.

Market-wide circuit breakers provide for cross-market trading halts during a severe market decline as measured by a single-day decrease in the S&P 500 Index. A cross-market trading halt can be triggered at three circuit-breaker thresholds: 7 % (Level 1), 13% (Level 2), and 20% (Level 3). These triggers are set by the markets at levels that are calculated daily based on the prior day’s closing price of the S&P 500 Index.

The Securities Information Processors (SIPs) for the US equity markets have established a quarterly MWCB testing schedule. On the scheduled dates, the Consolidated Tape Association Plan (CTA Plan) and the Consolidated Quotation Plan (CQ Plan), along with the Nasdaq/ UTP Plan, conduct MWCB testing that allows market participants across the securities industry to test their ability to receive messages associated with MWCBs, including decline status, halt, and resume messages. Market participants are also able to participate in testing of re-opening auctions following market-wide circuit breaker halts.

The Exchange states that quarterly MWCB testing is critical to ensure that securities markets halt trading and subsequently re-open in a manner consistent with the MWCB rules. NYSE explains that certain member organizations should be required to participate in scheduled MWCB tests. The proposed rule would provide the Exchange with authority to require participation by certain member organizations in industry-wide tests to validate that their processing in the event of MWCB is as expected within their systems.

The Exchange also proposes new Rule 49(c)(1), which would provide that each member organization notified of its obligation to participate in mandatory testing pursuant to standards established under paragraphs (b)(1) and (3) of Rule 4910 would also be required to participate in scheduled MWCB testing in the manner and frequency specified by the Exchange.

Following careful review, the SEC finds that the proposed rule change is in line with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.

In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act, which requires that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest, and that the rules not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.

The Commission also finds that the NYSE proposal is consistent with Section 6(b)(8) of the Act, which requires that the rules of an exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

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