New Trading Rules Proposed After Market Meltdown The SEC is proposing new rules following the May sixth "Flash Crash" in the stock market. Trade in some stocks may now be paused if the price moves more than 10 percent in a five-minute period.
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New Trading Rules Proposed After Market Meltdown

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New Trading Rules Proposed After Market Meltdown

New Trading Rules Proposed After Market Meltdown

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And U.S. market regulators, yesterday, announced rules aimed at slowing down stock trading during especially volatile periods. The new rules are meant to prevent the kind of sudden stomach-turning drop in stock prices that happened on May 6th when the Dow Jones Industrial Average fell nearly 1,000 points in a matter of minutes.

NPR's Jim Zarroli has been covering this story and joins me now.

Good morning, Jim.

Jim ZARROLI: Good morning.

NEARY: So what do these new rules say, Jim?

ZARROLI: Basically, they say that if the price of certain stocks has fallen 10 percent or more in a five minute period, then trading will take a brief pause. It will, you know, be a kind of speed bump, a chance for the system to catch its breath so you don't have these kind of manic periods when all the negative sentiment is feeding on itself. And the rules will apply to the biggest and most actively traded stocks.

NEARY: Well, isn't something like that already in place in the stock market?

ZARROLI: Well, the New York Stock Exchange has trading curves that were put in place after the 1987 stock market crash and they've been used from time to time. The problem is that the market has changed enormously since then. There's been an explosion of trading using high-speed computers, a lot of automated trading. You have a lot of these new alternative stock exchanges that have their own rules and they don't have the same curves necessarily. So these new rules would be uniform across all of the exchanges so they'd apply much more broadly.

NEARY: So does that mean that regulators know exactly what happened to cause that sudden drop on May 6th?

ZARROLI: You know, they're investigating it, but they're not really any closer to understanding it. They put out a kind of preliminary report, yesterday, that really left a lot of questions unanswered. They have a number of theories. They're looking into the role that a kind of derivatives contract played in what happened. They're also looking into something else that happened. Some trading firms apparently closed their doors and stopped trading for a little while. But it could be a lot of other factors as well or it could be some combination of them. At this point, no one really has any clear idea.

NEARY: Well, are stock exchange officials likely to go along with these new trading restrictions? Do they have to?

ZARROLI: Well, they actually helped the SEC draw up the new rules. I mean, the SEC worked with not only the electronic exchanges but the New York Stock Exchange. I think what happened on May 6th scared a lot of people because they didn't understand it, and they still don't so there's been a kind of push on the part of the industry to try to get to the bottom of things. And if they can't figure out why this happened, you know, it can affect the credibility of the markets and that's something the industry really can't afford.

NEARY: You know, if they don't know exactly what happened, what caused that drop on May 6th, why issue these new rules now and why do they think that they'll work to prevent similar problems?

ZARROLI: Well, I think that's a good question. I think that they are figuring it out. I think probably they figured that no matter what the cause is determined to be, that this will do some good. But it's also just a kind of an attempt, I think, to send a message to the markets that they're working on this, that they're getting behind it, which is really important right now.

NEARY: NPR's Jim Zarroli. Thanks so much, Jim.

ZARROLI: You're welcome.

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