The U.S. stock exchanges have until June 14 to get their systems ready for circuit breakers on individual stocks. A Securities and Exchange Commission proposal expected on Tuesday would halt trading on stocks for 5 minutes once they individually drop 10%. The new rules will be tested in a six month pilot program that is part of the SEC's response to the market structure issues unveiled in the 998-point momentary drop in the Dow Jones industrial average on May 6.  Many have blamed the May 6 market rout on a rogue computer-generated order. But regulators investigating the causes have yet to identify a clear cause. There was heavy selling activity in the stock futures market and that might have contributed. Computers coded to sell when the markets hit certain thresholds also likely contributed. But the biggest culprit is most likely the dynamics of the highly-splintered market itself.  When stocks started to plummet that day, trading at the New York Stock Exchange slowed down while its floor-based human brokers tried to sort out good orders from bad. But all-electronic exchanges, including NYSE's Arca, Nasdaq OMX, Bats Exchange and Direct Edge, continued trading and some stopped communicating with NYSE Arca. While NYSE's floor had circuit breakers, there were none in place elsewhere and despite the steep drop (and subsequent recovery), the Dow plunge didn't trip circuit breakers that apply to all trading.  Another part of the problem: Many traders, including a number of high frequency trading firms that normally make up 60% of daily trading volume, stepped aside and stopped buying, draining liquidity from the system when it was trying to deal with a tidal wave of sell orders.  The SEC is hoping a uniform application of single stock circuit breakers across the dozens of U.S. trading venues will be a good antidote to volatile downward swings in the future. But this isn't the last time a jolt will hit the market. The SEC is also studying the effects of various trends that have shaped the U.S. stock markets over the course of the last decade, including the proliferation of high frequency trading and of off-exchange trading in so-called dark pools. One of the biggest issues it may face is whether to impose obligations on market makers to participate in trading even in highly volatile markets.  On Monday, the first meeting of a joint task force by the SEC and the Commodity Futures Trading Commission will be held and they will reveal their preliminary findings on the "unusual events" of May 6. Committee members include Brooksly Born, a former CFTC head, Jack Brennan, former head of Vanguard, Richard Ketchum from the self-regulatory group Finra (which oversees the stock exchanges), and David Ruder, former SEC chairman. CFTC Chairman Gary Gensler hinted in recent testimony that the agencies were focused particularly on trading in stock futures tied to the S&P 500 index.  Some academics, including Georgetown finance professor James Angel, have been sounding alarms about potential glitches caused by the highly fragmented markets for more than a year. In a letter to the SEC earlier this month, Professor Angel wrote: "We didn’t have a Category 5 hurricane on May 6, 2010; we only had a Category 1. A Category 5 is still a distinct possibility if we do not make the right reforms."
The agency will propose speed bumps for volatile markets, putting a halt on trading for 5 minutes across market centers for individual stocks that fall 10%.