Snap analysis: Has the SEC overshot with circuit breakers?

By Edward Krudy

NEW YORK (BestGrowthStock) – The Securities and Exchanges Commission proposed on Tuesday introducing stock-specific circuit breakers in a bid to prevent the type of steep plunge seen on May 6.

Under the proposals, a 10 percent fall in an S&P 500 stock in a five-minute period would cause trading in that stock to be halted for five minutes.

The move is seen as a good start by some, but there are concerns because the SEC still has not managed to identify the underlying causes of the crash and that it is being too restrictive in treating the symptoms.

* The SEC still has to approve the proposals and has not given a timetable for adoption. Earlier on Tuesday, sources told Reuters that single-stock circuit breakers could start being rolled out on June 7.

* Some investors see the single-stock circuit breakers as a useful way to stem a severe market crash and prevent investors from losing money when thresholds for automatic sell orders are breached.

* There are some concerns that the SEC has ended up being too restrictive by making the circuit breakers too tight. Preventing people trading a stock when markets are falling could end up reducing liquidity and creating more panic.

* “It could serve to exacerbate (declines) and be counter-intuitive for what they’re trying to produce, which is better prices and a better market,” said Michael Pento, senior market strategist at Delta Global Advisors in Boston.

“A better market by definition is to enhance liquidity and to keep markets open, not to close them.”

* The SEC’s failure so far to identify the underlying causes of the crash is worrying some investors who believe the SEC may be just treating the symptoms of the problem and ignoring the causes.

* “To me it’s a lingering concern that they haven’t come up with a real answers to why the market plunged,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “Every day that goes by and there are no solid answers erodes confidence in the underpinning of the equities.”

* Some investors want the SEC to focus on the role high frequency traders played in the plunge amid claims they withdrew from the market at a crucial time, exacerbating tight liquidity conditions.

* “These circuit breakers are treating the symptoms and not the problem,” said Ablin. “My view is the problem is high frequency trading that in the total scheme of things is unnecessary, unnecessary and at worst parasitic.”

* The move is in keeping with the notion of a resurgent regulator as the SEC tries to show that it has bite after criticism it did not do enough to prevent the financial crisis.

Stock Market Research

(Additional reporting by Leah Schurr; Editing by Leslie Adler)

Snap analysis: Has the SEC overshot with circuit breakers?