Trading Halts and Suspensions for Securities and Derivatives

Market-Wide Circuit Breakers

As evidenced by recent market events, trading in U.S. equities may be halted temporarily pursuant to the national market system (NMS) Plan to Address Extraordinary Market Volatility, also known as the LULD Plan, as described below.¹ There are no corresponding market-wide circuit breakers for derivatives, although at least some designated contract markets (DCMs) cease trading upon the triggering of the LULD Plan and have certain price limit controls.²

National Market System Plan to Address Extraordinary Market Volatility: The LULD Plan sets forth certain parameters that trigger a pause in trading or suspend trading for the remainder of the day to address market-wide volatility, as described below.

• Market-Wide Circuit Breakers — To halt trading across the entire market, a market decline at one of three price levels must have occurred, meaning a decline in the price of the S&P 500 index during regular trading hours as compared to the previous day’s closing price for the index:
  • Level 1 Market Decline – 7 percent
    • If triggered, causes a 15-minute halt during 9:30 a.m.-3:25 p.m. ET (no halt after 3:25 p.m. ET) and only one halt per trading day.
  • Level 2 Market Decline – 13 percent
    • If triggered, causes a 15-minute halt during 9:30 a.m.-3:25 p.m. ET (no halt after 3:25 p.m. ET) and only one halt per trading day.
  • Level 3 Market Decline – 20 percent
    • If triggered at any time during the trading day, causes a halt in all trading for the remainder of the trading day.
• OTC Trading — These market-wide circuit breakers apply to both exchange and over-the-counter (OTC) trading in NMS stocks.³
• Individual Stock Circuit Breakers — The LULD Plan provides for additional trading limits and trading pauses for individual securities whose prices cross certain price bands relative to their average price over the preceding five minutes of trading, causing the stock to enter a “Limit State.” These price band percentage parameters vary depending on the type of security, its previous closing price and the time of day the circuit breaker is triggered.
• Securities Options — Securities options are not subject to the LULD Plan. However, options exchange rules typically provide that trading will be halted upon the occurrence of a market-wide trading halt under the LULD Plan.⁴

Futures Circuit Breakers: DCMs have certain price limits that were originally adopted in response to historic market declines in October 1987.

• Varies by Contract Type — Different futures contracts have different price limits and rules governing what occurs when triggered (e.g., some markets temporarily halt trading, while others may stop trading for the entire day).
• Price Limit Bands — Price limits are determined daily and can have multiple levels (e.g., certain equity index futures have a three-level expansion on the downside of 7 percent, 13 percent and 20 percent, and a 5 percent limit up and down in overnight trading).⁵

Trading Suspensions

The SEC and CFTC as well as the self-regulatory organizations that they regulate, have certain authority to halt or suspend trading, as described below.

SEC: The SEC has authority to suspend trading pursuant to Section 12(k) of the Securities Exchange Act of 1934 (Exchange Act)⁶ as follows:

• Ten-Day Suspension — suspend trading in any security, other than exempted securities,⁷ for up to 10 days
• Ninety-Day Suspension — suspend trading on all exchanges or otherwise in securities, other than exempted securities, for up to 90 days provided the President is notified and does not disapprove⁸
• Emergency Order — for up to 10 days, in an “emergency,” the SEC may suspend, restrict or take other actions (other than for exempted securities) it believes are necessary in the public interest and to protect investors to:
  • maintain or restore fair and orderly markets,
  • ensure prompt, accurate and safe clearance and settlement or
  • mitigate the substantial disruption of securities markets, investment companies, segments of markets or the processing of transactions
  • Extensions — The SEC has authority to extend an Emergency Order up to 30 days if the emergency still exists.
  • Emergency — an emergency in this context generally means
    • (i) a major market disturbance (or threat of disturbance) with “sudden and excessive fluctuations of securities prices
    • (ii) a substantial disruption (or threat of disruption) of the “safe or efficient operation” of the national system for clearance and settlement and
    • (iii) a major disturbance that substantially disrupts (or threatens to substantially disrupt) the function of securities markets, investment companies, segments of markets, or the processing of transactions⁹
• Security Futures — The SEC’s authority extends to security futures as well, provided the SEC consults with and considers the views of the CFTC.
• Presidential Override — The President has authority to terminate a 90-day suspension or an Emergency Order (or extension thereof).

Securities Exchanges: Pursuant to Exchange Act Rule 12d2-1, an exchange is authorized to suspend trading in any listed security in accordance with its rules provided the exchange promptly notifies the SEC of the effective date and reasons for suspension.¹⁰

• Duration — Such suspension may continue indefinitely until the SEC believes that the exchange is seeking to evade certain delisting requirements.
• FINRA — FINRA also has broad authority under its rules to suspend OTC trading in any NMS stock whenever the primary listing exchange halts trading or in response to certain “extraordinary market activity.”¹¹

CFTC: The CFTC has broad authority to direct a registered entity (e.g., a designated contract market)¹² when it has reason to believe that an emergency exists to take action it believes is “necessary to maintain or restore orderly trading in or liquidation of futures contracts” pursuant to an “emergency,” which means

• an actual or threatened market manipulations and corners,
• any act of the U.S. or a foreign government affecting a commodity or
• any other major market disturbance that prevents the market from accurately reflecting the forces of supply and demand.¹³

Designated Contract Markets: DCMs have broad authority to halt trading in contracts in the interest of fair and orderly markets.¹⁴ Pursuant to CFTC regulations, DCMs are required to have controls in place that pause or halt trading to address market disruptions and emergencies.¹⁵

• Duration — CFTC and DCM rules do not generally restrict the DCM in how long it may initiate a trading halt.¹⁶
• Security Futures — DCMs generally halt trading in broad-based index futures contracts when the LULD Plan has been triggered to halt trading in all equity securities.¹⁷

¹ The LULD Plan is available at http://www.luldplan.com/plans.html.

² See, e.g., Cboe Futures Exchange (CFE) Rule 417A (providing that the exchange shall halt trading upon the triggering of a market-wide circuit breaker under the LULD Plan).

³ See FINRA Rule 6121 (Trading Halts Due to Extraordinary Market Volatility). FINRA will also halt trading in OTC Equity Securities whenever it has halted trading in all National Market System stocks for the duration of the halt. FINRA Rule 6440.03.

⁴ See, e.g., Cboe BZX Rule 20.5.

⁵ See, e.g., Chicago Mercantile Exchange (CME) Rule 358.

⁶ 15 U.S.C. 78l.

⁷ The term “exempted securities” generally includes government securities (e.g., U.S. treasuries), municipal securities and certain other securities excluded from the definition of an “investment company” (15 U.S.C. 80a-3(c)) under the Investment Company Act of 1940. 15 U.S.C 78c(a)(12).

⁸ The SEC is also required to consult with and consider the views of the Secretary of the Treasury, the Board of Governors of the Federal Reserve System and the CFTC unless such consultation is impracticable in light of the emergency. 15 U.S.C. 78l(k)(6).

⁹ 15 U.S.C. 78l(k)(7).

¹⁰ 17 CFR 240.12d2-1.

¹¹ FINRA Rules 6120 (Trading Halts). FINRA may also initiate trading halts in OTC equity securities. FINRA Rule 6440 (Trading and Quotation Halt in OTC Equity Securities).

¹² Registered entities include designated contract markets, derivatives clearing organizations, boards of trade, swap execution facilities and swap data repositories. 7 U.S.C. 1a(40).

¹³ 15 U.S.C. 12a(9). This authority includes (i) setting temporary emergency margin levels on any futures contract; (ii) fixing limits that may apply to a market position acquired before the emergency.

¹⁴ See e.g., Nasdaq Futures Exchange (NFX) Rules, Section 13; CME Rule 579A.

¹⁵ 17 CFR 38.255.

¹⁶ See id.

¹⁷ See e.g., NFX Rules, Section 16 (Regulatory Trading Halts); CME Rules 35300 (halting trading in the E-mini S&P 500 where the LULD Plan is triggered or the New York Stock Exchange declares a trading halt); CFE Rule 417.