Unforeseen Consequences of New SEC Circuit Breakers
The SEC has proposed a new circuit breaker system that would first go into effect on a “trial” basis with S&P 500 stocks. The circuit breaker system would come into place after a 10% drop in any S&P500 stock within any 5 minute trading period. Immediately after the stock would cease trading for five minutes before starting again. Sounds great…until you really start thinking about it.
Fist Circuit Breaker Rollout
The first rollout of the new circuit breaker system will include only 500 stocks for testing, though the SEC has noted that it wishes to eventually expand the system to all stocks and exchange-traded funds. But there is just one problem, some exchange-traded funds will trip the circuit breaker frequently, if not once a month!
Triple Leveraged ETFs
Should the same rules be imposed on ETFs as they are on S&P500 stocks, we’re going to see a lot of breakers trip when big news comes out on any triple-leveraged ETF. As we are all well aware, big news in one stock (bad earnings) shines a negative light on the remaining stocks in the sector. If tomorrow Bank of America announces a $10 billion loss, you can bet your bottom dollar the triple leveraged financial funds will dive 10% in five minutes. All the while the stocks that make up the index continue to plunge more than 3.33%, the exchange-traded fund won’t be trading. Investors won’t be able to cut their losses, and other investors, sensing opportunities, won’t be able to buy at a discount.
Huge Oversight
This new circuit breaker is just another of many huge oversights that comes naturally with regulation. Rather than allow stocks to run their course throughout the day, the SEC will impose new rules to “protect” investors from a perfect storm crash, all the while locking them into positions that can plunge without the option to sell. I have no doubts that this system will be imposed and that the results will be devastating for holders of triple leveraged funds. Then again, it wasn’t too long ago that FINRA, through an emotionally charged press release, tried to take down the triple-leveraged ETF business in one swoop.
