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Posted on 1 May 2011 | 4,556 views

SEC Circuit Breaker Rules Fails to Stop Jazz Pharmaceuticals Flash Crash

Shares of Jazz Pharmaceuticals (Stock Symbol: JAZZ) opened the trading day on April 27, 2011 at $33.59 per share, the stock then went on to trade down slightly with normal volume until approximately 10:00 AM EST, when it plummeted for approximately two minutes before finding a bottom at $23.50 per share.

The 30% drop in Jazz Pharmaceuticals share price occurred in less than five minutes which was bewildering and certainly exceeded the U.S. Securities and Exchange Commission’s 10% Circuit Breaker rules, which would have halted the stock — there has been no official word from the SEC.

The plan for the “Circuit Breakers” was worked out by the SEC and the major exchanges following the May 6, 2010 “Flash Crash” market plunge that saw the Dow Jones industrials lose nearly 1,000 points in less than a half-hour.

In September of 2010, regulators adopted “Circuit-Breaker” rules that briefly halt trading in U.S.-listed stocks when their price moves 10% or more during a rolling five-minute span. The Securities and Exchange Commission said on April 5 that it wants to replace the circuit breakers with a new “Limit Up-Limit Down” rule.

The rule would set up guard rails that allow trading to be executed within a tight price range. The preset band is tied to recent prices for a stock. The SEC aims to provide liquidity but prevent wild price swings. If a stock’s price jumps out of the band and does not come back within the range in 15 seconds, trading would be halted for five minutes.

Jazz Pharmaceuticals almost instantaneously recovered from the sudden and unexpected drop in its shares but not before traders could take advantage of the circumstances. Its shares closed down $0.66 on the day to close at $32.93 per share.

Jazz Pharmaceuticals Flash Crash Chart

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