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Circuit Breakers: Stop Lights or Invitations to Trouble? With AM-Markets Rdp Bjt

October 16, 1989

NEW YORK (AP) _ The securities industry compares its ″circuit-breaker″ system of temporary market trading pauses with traffic lights at an intersection.

Like traffic lights, the circuit breakers are intended to help calm wild markets by halting severe price declines and giving traders and investors a chance to stop and check the financial landscape before continuing.

But critics argue that the system - which takes effect automatically when prices fall wildly - is possibly counterproductive and could worsen any downturn by causing a traffic jam of people who want to sell but can’t do so.

″The reality of it is ... it could really snowball and cause more selling,″ said Jack Baker, who handles trading of large blocks of stocks for Shearson Lehman Hutton Inc.

The circuit breakers essentially are temporary trading restrictions and halts that are imposed during major price swings on the New York Stock Exchange and Chicago Mercantile Exchange stock index futures market.

The system was deployed on those markets a year ago to help restore investor confidence after the Oct. 19, 1987 crash saw the Dow Jones Industrial Average plummet 508 points.

Institutional investors employing computerized trading strategies often use stock-index futures traded on the Chicago exchange to hedge against losses in the stock market. But that kind of trading often can cause wild price swings on both markets, and was blamed by many critics for worsening the 1987 crash.

The securities industry and federal regulators felt more coordination was needed between the equities and futures markets.

Richard Torrenzano, spokesman for the New York Stock Exchange, said that in a wild market the circuit breakers″can slow things down and let everyone assess what is going on.″

The system kicked in on the Merc last Friday, after stock index futures tumbled in response to a plunge in stock prices that saw the Dow Jones industrial average finish down 190.58 points.

But on Monday, the circuit breakers barely figured in trading as the Dow industrials shook off a sharp early decline and finished well above Friday’s close.

Under the NYSE system, stock trading is halted for an hour if the Dow falls 250 points from its previous close and for two hours if it falls an additional 150 points for a total of 400 points in a single day.

One feature of the system was tripped early Monday when Standard & Poor’s 500 index futures contracts fell 5 points at the opening. An opening 5 point drop in those contracts traded on the Chicago Merc triggers a 10-minute period during which those contracts cannot be traded at any lower price.

A spokeswoman for the Merc, Julie Jacobs, said that on Monday buyers surfaced within seconds at prices matching or higher than the opening price and trading was never interrupted.

On Friday, one Mercantile Exchange trading limit was imposed shortly after 2 p.m. when S&P futures contracts fell 12 points - or the equivalent of almost 100 points in the Dow industrials. The price of those contracts was not allowed to fall for 30 minutes although trading could continue at that price or higher. The next pause was reached about 45 minutes later when the S&P futures fell 30 points from the previous day’s close. The circuit breaker program calls for trading at that price or higher for an hour. Since Friday’s trading day was to end 30 minutes later, the pause ended trading at any lower price for the day.

Alfred E. Goldman, director of technical analysis at the investment firm A.G. Edwards & Sons Inc. in St. Louis, said the restrictions in the futures market ″didn’t do any good whatsoever.″ He noted the bulk of the Dow’s decline of 190.58 points Friday came in the final hour of trading.

Shearson’s Baker said that while the futures markets limits were in effect, sell orders simply backed up. ″People who can’t go to the futures markets are going to sell stocks,″ he said.

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