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    This past Thursday marked the one-year anniversary of the US stock market’s death when stocks saw their last high. Market bulls have spent a year looking like the walking dead. They’ve...

Did The SEC Hint At A 7% Market Plunge?

Tyler Durden's picture


Back in October 19, 1988, in response to Black Monday from a year earlier (the SEC is not known for fast turnaround times)  a little known SEC rule came into effect, known as Rule 80B, and somewhat better known as "Trading Halts Due to Extraordinary Market Volatility" which set trigger thresholds for market wide circuit breakers - think a wholesale temporary market shutdown. According to Rule 80B (as revised in 1998), the trigger levels for a market-wide trading halt were set at 10%, 20% and 30% of the DJIA. The halt for a 10% decline would be one hour if it occurred before 2 p.m., and for 30 minutes if it occurred between 2 and 2:30, but would not halt trading at all after 2:30. The halt for a 20% decline would be two hours if it occurred before 1 p.m., and between 1 p.m. and 2 p.m. for one hour, and close the market for the rest of the day after 2 p.m. If the market declined by 30%, at any time, trading would be halted for the remainder of the day. Needless to say, a 30% drop in the market in our day and age when the bulk of US wealth is concentrated in the stock market, would be a shot straight to the heart of the entire capitalist system. Which is why the smallest gating threshold is and has always been the key.

However, despite the revision, as anyone who traded stocks on that fateful day in May knows, the market-wide circuit breakers were completely ineffective and unused during the HFT-induced and ETF-facilitated flash crash of May 6, 2010. In turn, the SEC's flash crash response was to implement individual stock-level circuit breakers which however, instead of restoring confidence in the market, have become the butt of daily jokes involving freaked out algos. This was merely the most recent indication of how horribly the SEC's attempts to "regulate" a market it no longer has any grasp or understanding of, backfire on it.

However, even that may pale in comparison to just how badly the SEC may have blundered yesterday afternoon, when it proposed yet another revision to its market-wide halt rule. And once again, instead of making traders and investors more comfortable that the SEC is capable and in control, the questions have already come pouring in: is the SEC preparing for another massive market crash?

This is what hit the tape from the SEC late yesterday:

The Securities and Exchange Commission has approved two proposals submitted by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) that are designed to address extraordinary volatility in individual securities and the broader U.S. stock market.


One initiative establishes a “limit up-limit down” mechanism that prevents trades in individual exchange-listed stocks from occurring outside of a specified price band. When implemented, this new mechanism will replace the existing single-stock circuit breakers that the Commission approved on a pilot basis after the market events of May 6, 2010.


The second initiative updates existing market-wide circuit breakers that when triggered, halt trading in all exchange-listed securities throughout the U.S. markets. The existing market-wide circuit breakers were adopted in October 1988 and have been triggered only once, in 1997. The changes lower the percentage-decline threshold for triggering a market-wide trading halt and shorten the amount of time that trading is halted. The exchanges and FINRA will implement these changes by February 4, 2013.

The key word is bolded and underlined: lower. Because as noted above, the upped market-close threshold is irrelevant: should the S&P trade down to 800 on Monday, western civilization will have far bigger problems to worry about than reversing a market crash. It is the tiniest quantized increment that is relevant. Which according to the SEC is now a "mere" 7% to enact a market holiday, either temporary or indefinite.

This is how the market-wide circuit breaker language will look going forward:

  • Reducing the market decline percentage thresholds needed to trigger a circuit breaker to 7, 13, and 20 percent from the prior day’s closing price, rather than declines of 10, 20, or 30 percent.
  • Shortening the duration of trading halts that do not close the market for the day to 15 minutes, from 30, 60, or 120 minutes.
  • Simplifying the structure of the circuit breakers so that there are only two relevant trigger time periods, those that occur before 3:25 p.m. and those that occur on or after 3:25 p.m. The two periods replace the current six-period structure.
  • Using the broader S&P 500 Index, rather than the Dow Jones Industrial Average, as the pricing reference to measure a market decline.
  • Requiring the trigger thresholds to be recalculated daily rather than quarterly.

Additional, the SEC also adopted less relevant single-stock trading halts. Think Italian stock market where financial firms trade either limit up or limit down day after day now for months. Surely that helps restore confidence in the market:

The “limit up-limit down” mechanism, established jointly by the exchanges and FINRA, prevents trades in individual listed equity securities from occurring outside of a specified price band, which would be set at a percentage level above and below the average price of the security over the immediately preceding five-minute period. For more liquid securities — those in the S&P 500 Index, Russell 1000 Index, and certain exchange-traded products — the level will be 5 percent, and for other listed securities the level will be 10 percent. The percentages will be doubled during the opening and closing periods and broader price bands will apply to securities priced $3 per share or less.


To accommodate more fundamental price moves, there would be a five-minute trading pause, similar to the pause triggered by the current circuit breakers, if trading is unable to occur within the price band for more than 15 seconds.


Under the new plan all trading centers, including exchanges, automated trading venues, and broker-dealers executing trades internally, must establish policies and procedures to prevent trades from occurring outside the applicable price bands, honor any trading pause, and otherwise comply with the procedures set forth in the plan.

In the grand scheme of things, the stock limit mechanisms are irrelevant. They never worked before, and will not work in the future. Perhaps if the SEC really cared about restoring some single-stock level confidence it would consider implementing the stub trade ban which allegedly prevents idiotic executions from taking place, yet which as Nanex shows us on a daily basis, happens all the time with exchanges gaming every possible loophole.

What is relevant, and what is very disturbing, is why did the SEC just lower the band from 10% to 7%: why 7%? And why now? What is even more troubling is that as Bloomberg's Nina Mehta writes, the decision to make these changes was not made by actual traders, not by actual people who understand how broken the market is (such as those who have been banging the table on broken market structure since 2009... we are fairly confident readers know who these entities are), but... wait for it... Nobel prize winning economists!

An advisory committee to the SEC and Commodity Futures Trading Commission recommended changing the marketwide system. The advisers included Joseph Stiglitz, an economist who won the Nobel Prize; David Ruder, a former SEC chairman; Brooksley E. Born, who was chairman of the CFTC; and John J. Brennan, chairman emeritus and senior adviser at Vanguard Group Inc.

And another entity involved, is the exchange which allowed Corzine to make off with billions in client funds, which have, since the November bankruptcy, still not been discovered:

The owner of the Chicago Mercantile Exchange is examining the SEC’s approval of the marketwide circuit breakers, Michael Shore, a spokesman for CME Group Inc. (CME), wrote in an e-mail. The company has circuit breakers for equity-index futures that are consistent with those in the stock market.


“CME Group has been a strong advocate for more appropriately calibrated marketwide circuit breaker trigger levels that are coordinated across trading venues,” Shore said. “We have commented extensively on the proposals, are currently evaluating the changes approved by the SEC and will be submitting proposed amendments to our rules in the near future.”

Surely nothing quite like getting an economist and an exchange that stood idly by as billions in client funds vaporized, together in the same room and hatching a brilliant plan to avoid shareholder losses.

The question obviously is: what does the SEC know that nobody else does? And why now, just as everyone is terrified that Europe is on the verge of an all out collapse? And just as importantly, why wait until February 2013? Why not implement now to at least avoid the potential of a total market cataclysm including potentially the game-ending 30% drop in the last hour of trading?

Basically what the SEC just did is make sure everyone has a stop loss order 7% below the prevailing NBBO. And with so little volume in markets, and with the HFT algos having nothing better to do than inflicting max pain on traders by hunting stops, primarily to the short squeeze side, but now courtesy of the SEC, to the downside as well, one can be sure the HFT-induced selling pressure to hit the market-wide "Max Pain" point will suddenly become very topical.

Our advice: have limit sell orders a few percentage points above the 7% threshold that the SEC suddenly is infatuated with. Because once they are crossed, the entire market will light up in one massive stop loss trading activation. It would also be prudent to pair trade this limit order with a limit buy just above the 20% down threshold that DKed orders during flash crash day.

In other words, thanks to the SEC's statement, and to the psychological effect of "framing" so popular to traders, down 7% in milliseconds just became the New Killing It.

We leave readers with the current chart showing the NYSE's own market-wide trading halts. Learn it well.

Allow us to paraphrase the last sentence: "in the event of a 3900-point decline in the DJIA, you better be locked and loaded."

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Sat, 06/02/2012 - 12:02 | 2487223 junkyardjack
junkyardjack's picture

The market could use a few holidays, its been working overtime to produce hopium...



Sat, 06/02/2012 - 16:44 | 2487725 Atomizer
Atomizer's picture



Obama administration has once again rebranded their campaign slogan. Advisers of the Obama administration spearheaded the initial slogan as What The Fuck. Due to the low popularity, the message was changed to FORWARD. Again, mounting negativity continued to prevailed due to negative poll numbers.


The administration has finally released the newest campaign slogan.. Hope & Choom 

In order to avoid further scrutiny regarding the upcoming debt ceiling debate, they decided to utilize the same rainbow emblem. This time around, a leprechaun will be added to unearth a stone to uncover a EBT card found next to the rainbow [look closely at his back pocket, the UN internet Flame source code reveals itself]. Behind the leprechaun is a mushroom gleaming  an unknown radiance. This symbolic expression will represent a Obama Care health card for the pickings. This party really means business. I can only imagine they’ll kick Romney in the nuts over this marketing stunt. 


Sat, 06/02/2012 - 20:11 | 2488009 Manthong
Manthong's picture

“Choom we can believe in.”

Sat, 06/02/2012 - 20:14 | 2488016 GOSPLAN HERO
GOSPLAN HERO's picture



Sun, 06/03/2012 - 06:02 | 2488725 eclectic syncretist
eclectic syncretist's picture

Thanks for the link.  It took me a couple of minutes to get past the Elvis impersonator mutton chops and jet black dyed hair, but his rationale is solid and well-grounded. 

Sat, 06/02/2012 - 21:40 | 2488147 WhackoWarner
WhackoWarner's picture

Pardon my naive ignorant sheared sheep point of view BUT any loss llimits on a rigged market only protect the the magnitude of the losses of the algo players and slim market makers. Not the investor.

Sat, 06/02/2012 - 12:22 | 2487225 unununium
unununium's picture

Always have GTC limit orders in place to take profits from crazy swings.  These worked during the flash crash.

Sat, 06/02/2012 - 12:40 | 2487280 LongSoupLine
LongSoupLine's picture

I am extremely worried this new SEC rule will affect my positions.

Oh wait...my "positions" are physical...nevermind.

Sat, 06/02/2012 - 13:08 | 2487329 malikai
malikai's picture

All my favorite "positions" are "physical".

Sat, 06/02/2012 - 13:48 | 2487359 The Big Ching-aso
The Big Ching-aso's picture



In the stock market right now you're pretty much limited to taking a rear entry position.

Sat, 06/02/2012 - 16:54 | 2487742 Zero Govt
Zero Govt's picture

yes we wouldn't want the Big Boys taking it up the arse on large positions now would we

rig the market and give them time to make for the Exits (in 'outside hours' trading times and dark pools) and leave someone else holding the bag

Sat, 06/02/2012 - 19:41 | 2487960 Dead Canary
Dead Canary's picture

This is why it is important to be adequately invested in Grease.

Sat, 06/02/2012 - 21:02 | 2488083 fourchan
fourchan's picture

welcome to the "Free market".


all i need to know is that the direction is down, everything else is noise and blather.

Sat, 06/02/2012 - 13:34 | 2487389 WmMcK
WmMcK's picture

Long Kama Sutra, especially practiced in the presence of PM's.

Sun, 06/03/2012 - 13:49 | 2489383 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Pretty Mistresses

Sat, 06/02/2012 - 14:15 | 2487447 Cadavre
Cadavre's picture

"Allegorical" paper positions sure ain't what they used to be.

Please fold your seat trays and secure your seat belts, we've flown into a "liquidity" void and are traveling through another dimension, a dimension where price diminishes to value. There's a signpost up ahead. It says "Exit the Market"



Sat, 06/02/2012 - 22:55 | 2488318 Joseph Jones
Joseph Jones's picture

I see what you did there, Rod.

Very nice! 

Sat, 06/02/2012 - 14:53 | 2487513 Acorn10012
Acorn10012's picture

In Russia, every position is physical. And involves a ball gag and handcuffs.

Sat, 06/02/2012 - 13:57 | 2487420 francis_sawyer
francis_sawyer's picture

 "Always have GTC limit orders in place to take profits from crazy swings. These worked during the flash crash"


Always have a little of physical Au & Ag... These will work well in a flash crash of fiat paper (especially when the flash crash turns into a hockey stick formation)...

Sat, 06/02/2012 - 17:02 | 2487756 Cadavre
Cadavre's picture

Always have GTC limit orders in place

Do HFT's have access to limit order stops?


Sat, 06/02/2012 - 17:14 | 2487778 aldante
aldante's picture

Hft's love the low hanging fruit.....

Sat, 06/02/2012 - 12:05 | 2487227 blueridgeviews
blueridgeviews's picture

It's not enough that the Fed manipulates the market, now it wants to tell people when they can sell? Unbelievable!

Sat, 06/02/2012 - 12:25 | 2487257 Dr. Kananga
Dr. Kananga's picture

Why not? It's their money. /sarc

Sat, 06/02/2012 - 13:07 | 2487317 Ray1968
Ray1968's picture

So when everyone finally realizes that Facebook is a fraud, it will go limit down 7%. Then how many days before you can bail? What happens when a stock opens bidless? You're stuck with it to infinity.


This is a rhetorical question of course; I bailed from the stock market  years ago.

Sat, 06/02/2012 - 13:10 | 2487330 Dr. Kananga
Dr. Kananga's picture

Charts will look like stairwells, instead of heart attacks (see Greek banks.)

Sat, 06/02/2012 - 14:42 | 2487497 potlatch
potlatch's picture

lol i love this site.  brilliant wit there, OP

Sat, 06/02/2012 - 19:31 | 2487964 Dead Canary
Dead Canary's picture

"If it ain't nailed down, it's mine, and if I can pry it up, it ain't nailed down." ~ Jamie Dimon

Sat, 06/02/2012 - 14:38 | 2487491 Cadavre
Cadavre's picture

They tell you who you can sell to too!

Can't find the cite, but `member the Bush administration telling Conoco shareholders to eat a 2$/share haircut  because selling to the Chnese was verbotten,

Sat, 06/02/2012 - 15:36 | 2487596 Arnold Ziffel
Arnold Ziffel's picture

Backroads of Flordia is where I think I'll go to enjoy a 'market holiday."  Eat some of that deep fried oily Shell fish (oops, i mean deep fried BP fish, not Shell) and take in a little sun and fun.

Sun, 06/03/2012 - 03:32 | 2488649 StychoKiller
StychoKiller's picture

Try the glow-in-the-dark tuna, it's to die for!

Sat, 06/02/2012 - 22:15 | 2488222 Amish Hacker
Amish Hacker's picture

When a government agency can prevent market prices from going "outside a specified price band," you really don't have a market any more.

When the largest investment bank can go an entire quarter without a single losing day of trading, then what they're doing isn't really trading.

Sat, 06/02/2012 - 12:06 | 2487230 poopman
poopman's picture

its official zerohedge has jumped the shark. it is now just simply another fear mongering alternative news outlet.


Sat, 06/02/2012 - 12:10 | 2487235 maxmad
maxmad's picture

oh noes!  Someone is on the wrong side of the market!   "You're going the wrong way, You're going to kill somebody!"

Sat, 06/02/2012 - 19:40 | 2487979 slewie the pi-rat
slewie the pi-rat's picture

hey, max_m.d.!

check this out from slewieintel :

  • poopman:  1 year;  35 weeks
  • this is his 8th post, total
  • 7 posts since aprilFool's day, 2012
  • 2 today
Sat, 06/02/2012 - 23:05 | 2488342 Osmium
Osmium's picture

Ha, funny movie.  "How do they know where we are going?"

Sat, 06/02/2012 - 12:13 | 2487243 Tyler Durden
Tyler Durden's picture

Actually, some formerly relevant bloggers accused ZH of "officially jumping the shark" back in 2009 when we warned the market was manipulated by algos, that a Fed-controlled market was a disaster just waiting to happen, and was set for a crash unlike any seen before (and confirmed a few months later in 2010). 

We still have to see those formerly relevant bloggers come up with a follow up.

More importantly, where in the above article does it say "Sell everything?" Habitual gamblers will double down to zero with or without our cautions, which incidentally, since the summer of 2009 have been to avoid stocks entirely and to simply purchase hard assets.

If anything, we suggest to have a limit sell order couple with a limit buy.

But to know that would imply actually reading what you comment on...

Sat, 06/02/2012 - 13:10 | 2487333 malikai
malikai's picture

O/T, but it looks like those doomer Libertarians are at it again!


Sat, 06/02/2012 - 14:41 | 2487496 MARGINKARLANDTH...


Sat, 06/02/2012 - 16:15 | 2487677 EINSILVERGUY

I often times see very well argued positions on ZH from people who bring a varied set of backgrounds and experience and knowledge. Other times I feel like a group of 13 year kids have taken over their parents basement, pounding on the keyboard between fits of laughter after saying shit ( or some variant)for the infinite time and staring at the first peak of bush from their dad's old playboy collection.  I must officially be old

Sat, 06/02/2012 - 13:24 | 2487353 CrashisOptimistic
CrashisOptimistic's picture

It's probably useful to point out that amid the fear (and there's no other word for 1.45% 10 yr T's) the market was DOWN in 2011, and it's UP in 2012.

The S&P is up 1+% YTD.

Stop using history.  There is no history.  This is a world of serial intervention.  Not a world of technical or even fundamental analysis.  If there is a creditor threatening the system, he will be killed.  If gold threatens the system, transactions with it will be taxed at 60%.

Man made things like "value" can be controlled by Army firearms or gov't edict.  Only physics ends this.

Sat, 06/02/2012 - 17:05 | 2487759 prains
prains's picture

math actually ends it, physics being a corollary

Sat, 06/02/2012 - 19:15 | 2487944 Ranger4564
Ranger4564's picture

Is that the math of high frequency trading algorithms, derivatives, ballistics analysis, facial / voice / anger / threat recognitition, or maybe retinal / rectal / finger scans?  Yes, indeed, math ends it. 

Thank god we also have Ethics / Humanities / Philosophy / Theology / Arts as a counterweight. 

I'm just looking for a large enough lever to catapult math into interstellar space where it can meet its end when it collides with anti-math.

Sat, 06/02/2012 - 22:19 | 2488232 Amish Hacker
Amish Hacker's picture

Don't know about math, but love is chemistry, sex is physics.

Sat, 06/02/2012 - 14:48 | 2487507 geewhiz190
geewhiz190's picture

great piece, probably not fully understood by the bulk of the comments which seem to support your view that it's too long for most readers to read completely.

Sat, 06/02/2012 - 15:28 | 2487583 gatorengineer
gatorengineer's picture

Markets are programmed not to drop precipitously.  There is a maximum down angle that they are allowed somewhere on the order of half a percent an hour....  World war 3 could go off and the Algos would as programmed simply walk it down at a given pace.  you dont have to believe me, just look at the charts.  Line shots are however allowed to the upside.

Sat, 06/02/2012 - 20:12 | 2488011 Rahm
Rahm's picture

Morgan is a switch hitter if you know what I mean.  Scarlett letter.

Sat, 06/02/2012 - 12:31 | 2487270 EverythingEviL
EverythingEviL's picture

Poopman, it's official. You are a fucking moron! Now telling the truth is fear mongering...get out of here loser.

Sat, 06/02/2012 - 12:48 | 2487291 peekcrackers
peekcrackers's picture

Poopman  .. why do you chose to stay on this site ? are you a paid shill ? I cant understand if you feel ZH is so "untrue" move along back to CNBC where you came from .

Sat, 06/02/2012 - 12:54 | 2487306 my puppy for prez
my puppy for prez's picture

He simply proves the old adage:  Poop for brains!

Sat, 06/02/2012 - 14:07 | 2487431 Bay of Pigs
Bay of Pigs's picture

he also called for Faceplant @85 the first day

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