New stock trading rules proposed to avoid another &#39;flash crash&#39;

Federal regulators are considering new limits on intraday stock volatility aimed at avoiding another ?flash crash? like the one that rocked Wall Street last May 6.

The Securities and Exchange Commission late Tuesday said major stock exchanges proposed the idea of a ?limit up/limit down? system to keep share price moves from spiraling out of control.

The system would replace the individual-stock ?circuit breakers? pilot program put in place after the flash crash, when some big-name stocks briefly plunged as low as a penny a share amid a flood of computer-driven sell orders.

The current circuit-breaker system has been criticized for automatically halting trading if a stock moves 10% within five minutes. The new system would allow time to see if transactions could occur within a preset price band before a halt would kick in.

From the SEC:

The proposed ?limit up/limit down? mechanism would prevent trades in listed equity securities from occurring outside of a specified price band, which would be set at a percentage level above and below the average price of the security over the immediately preceding five-minute period. For stocks currently subject to the circuit breaker pilot, the percentage would be 5 percent, and for those not subject to the pilot, the percentage would be 10 percent.

The percentage bands would be doubled during the opening and closing periods, and broader price bands would apply to stocks priced below $1.00. To accommodate more fundamental price moves, there would be a five-minute trading pause -- similar to the pause triggered by the current circuit breakers -- if trading is unable to occur within the price band for more than 15 seconds.

?Upgrading our trading parameters will help our markets retain the confidence of investors and companies,? SEC Chairwoman Mary L. Schapiro said in a statement.

The SEC asked for public comment on the idea for 21 days.

-- Tom Petruno