Financial heavyweights including Morgan Stanley, MS -3.47% Citadel Securities and BlackRock Inc. BLK -2.71% are exploring potential changes to the U.S. stock market’s circuit breakers after the rarely used mechanisms repeatedly halted trading last month.
The firms belong to a loose industry task force made up mainly of brokerages, trading firms and exchanges that held several rounds of discussions in recent weeks on circuit breakers, said people familiar with the matter. The group is reviewing how circuit breakers worked during the unprecedented selloff in March triggered by concern over the coronavirus pandemic and is identifying possible fixes to recommend to the Securities and Exchange Commission.
SEC officials have taken part in the group’s calls, the people said.
A major focus of the task force has been a potential revision of the circuit-breaker rules to make it less likely for a marketwide trading halt to occur right after the opening bell at 9:30 a.m. ET, the people said. That can happen if global market sentiment has sharply deteriorated overnight, putting stocks on track for big losses.
During three of the four occasions when circuit breakers were tripped last month, the halt came within a few minutes of the open when the S&P 500 dropped 7%. On March 16, trading was halted one second after 9:30 a.m. That prompted criticism that there was no point in opening the stock market only to halt trading immediately.
Still, loosening the circuit-breaker rules to let stock indexes swing more freely would chip away at a decades-old system designed to protect investors during crashes.
Trading was halted one second after the 9:30 a.m. opening on March 16.
Photo: Michael Nagle/Zuma PressCircuit breakers are meant to thwart financial panics by giving investors time to pause and digest fast-moving information. The SEC first mandated marketwide circuit breakers after the Black Monday crash of 1987 and adjusted them in response to the 2010 flash crash.
Under current rules, a 7% drop in the S&P 500 triggers a 15-minute halt. If the market goes on to fall 13%, trading is halted for another 15 minutes. If it decreases 20%, trading is halted for the rest of the day. The latter two scenarios have never occurred.
Several members of the task force, according to the people familiar with the matter, suggested relaxing the circuit-breaker regime at the start of the day—between 9:30 a.m. and 9:45 a.m., for instance. Under such an approach, a drop greater than 7% would be required to halt trading during that period, the people said.
One idea was to allow the market to open down 7% but to halt trading if losses accelerated and the S&P 500 hit another threshold, such as 13%, they said. Some task-force participants questioned the need for having circuit breakers at all at the open, but others countered that it was important to retain some protections at 9:30 a.m., the people said. So far, the group hasn’t come to a consensus on any changes.
Any revisions to the circuit breakers would need to be approved by the SEC in a lengthy process that would be open to public debate. The task force expects to study data from March before issuing any recommendations, the people said. It is possible the group might not recommend any changes after it finishes that review.
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“The SEC is pleased that different players in the industry are working together to assess how our market structure regulatory mechanisms have worked in real market conditions, and whether any changes might be warranted,” Brett Redfearn, director of the SEC’s division of trading and markets, said in a statement.
Exchanges and other firms agreed to form the task force last year, with SEC encouragement, before the Covid-19 pandemic sent markets into a tailspin, the people familiar with the matter said. The group had several conference calls in March when circuit breakers were tripped for the first time since 1997. That injected momentum into what otherwise would have been theoretical discussions, the people said.
The task force is also debating how to fix dislocations such as those that emerged recently between a key futures contract and an exchange-traded fund that both track the S&P 500, they said.
Prices for S&P 500 futures and the SPDR S&P 500 ETF Trust, best known by its ticker, SPY, almost always move in tandem. But if markets swing sharply overnight, gaps can appear between them, potentially sowing confusion over where stocks are likely to open in the morning.
A longstanding rule of the futures-exchange operator CME Group Inc. limits overnight price swings in the futures to 5% up or down. No similar limits govern the trading of SPY in the after-hours trading session from 4 p.m. to 8 p.m., or in premarket trading from 4 a.m. to 9:30 a.m. On March 16, at 9:20 a.m., for example, SPY was down 11% from its previous closing value, while the futures were stuck at their 5% limit-down level.
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BlackRock and other task-force members are in favor of greater harmonization in how equities and futures are allowed to trade overnight, said a person familiar with the matter, but the details still need to be hashed out.
CME has said ETFs should face restrictions so they are aligned with its own limits on S&P 500 futures. Members of the circuit-breaker group have privately urged CME, also a member of the task force, to widen its 5% overnight limits, potentially to 7%, the people said.
But CME has resisted such a step. Expanding the 5% limits on S&P 500 futures in overnight trading when stock exchanges are closed would be “reckless,” CME Chairman and Chief Executive Terrence Duffy said in an interview.
Write to Alexander Osipovich at alexander.osipovich@dowjones.com and Dawn Lim at dawn.lim@wsj.com
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