SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

DRAFT
the highly automated markets currently existing in the United States. Nonetheless, the
most relevant studies fail to document a strong magnet effect.
5. Circuit breaker threshold level
A few commenters provided analysis to understand the impact of different thresholds for
the circuit breaker proposal (Managed Funds Association, Jordan & Jordan, SIFMA and
Credit Suisse Securities). These analyses conclude that a circuit breaker triggered off a
10% decline across-the-board for all NMS stocks might be too aggressive. In addition,
the commenters conclude that lower priced stocks should have a higher threshold. These
conclusions are largely based on the number of stocks triggering the circuit breaker
instead of the distribution of returns or how rare triggering a circuit breaker would be. As
such, the selection of a trigger based only on a count of stocks seems arbitrary. In
addition, these results are based on historical data, much of which is from a period of
high volatility and during which many stocks experienced significant price drops. This
can bias the analyses into overestimating the number of stocks that would trigger the
circuit breaker on a typical day. However, we believe they provide some useful evidence
to understand the impacts of the circuit breaker threshold level.
For example, based on Managed Funds Association and Jordan & Jordan analysis, a 10%
threshold over the past 10 years would have captured more than a hundred stocks on
average at any one time, many of which may have justified price drops based on
important corporate announcements or investor concerns relating to economic stress for a
company or sector. If the goal of a threshold level is to minimize the chances that stocks
with routine news announcements trigger the threshold, then these analyses suggest that a
10% threshold may be triggered too often. However, while the analyses claim that many
stocks triggering a 10% threshold have justified price drops, the analyses did not actually
examine why prices dropped or produce statistics on what portion dropped because of
announcements. Therefore, that part of the analysis is somewhat anecdotal as opposed to
empirical, meaning that a careful empirical analysis may or may not lead to the same
conclusion.
In addition, the SIFMA analysis concludes that the Commission should adopt a twotiered
approach to setting the threshold, e.g., that a higher percentage be applied to stocks
that regularly trade at low prices (i.e., using 15% or 20% as the threshold for stocks
trading at $10 or less) or incorporating a set dollar decline that must be attained before
the circuit breaker is triggered. They estimate that such a two-tiered approach would
significantly reduce the number of triggered stocks in the under $10 category that would
otherwise be triggered without any abnormal activity. As stated above, an understanding
of the portion of triggered stocks that experienced abnormal activity would be useful in
setting a threshold for the circuit breaker. However, SIFMA did not actually analyze how
often the stocks triggering the threshold experienced abnormal activity, so this conclusion
is not actually based on empirical evidence.
While low priced stocks may show greater volatility than high priced stocks, the
motivation for having a two-tiered approach should be compatible with the goal of
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