The SEC recently approved two proposals with the hope that they will curb market volatility like that experienced during the flash crash of May 2010.  Each proposed rule will be subject to a one-year pilot program.  The first proposed rule involves a limit-up-limit-down mechanism.  The second updates existing circuit breakers.  Both are meant to protect the investing community.

The limit-up-limit-down mechanism is meant to prevent trading in a particular exchange-listed equity from taking place outside of an enumerated band.  This new mechanism will replace the single-equity circuit breakers adopted after the flash crash.  The second proposal updates the market-wide circuit breakers which halt trading in the exchanges.  The significant change to the existing circuit breaker is that there will now be a lower threshold to trigger it, but, at the same time, shorten the length of the halt.  These proposals will be assessed and tweaked as needed before implementation in February 2013.

These proposals are much like insurance; something that is important to have, but you never want to use it.  Unfortunately, we will not know the effectiveness of these tools against volatility until we have volatility like that sustained during the flash crash.  Here is to hoping that we never have to find out.