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Key Officials Wary Of ‘Circuit Breaker’ Proposal

Fri., Jan. 30, 1998

Top administration officials voiced concern Thursday about a new proposal by the nation’s stock exchanges that would halt trading for the day if the Dow Jones industrial average plunges 20 percent.

The government’s top securities regulator, Arthur Levitt Jr., said the so-called “circuit breakers” designed to prevent a market meltdown should be used very rarely - possibly once in a generation.

Levitt is chairman of the Securities and Exchange Commission, which must approve any change in circuit breakers. The plan agreed to Monday by the exchanges would be the most radical revision yet of the mandatory trading pauses.

In testimony to the Senate Banking subcommittee on securities, Levitt warned that early market closings create uncertainty for investors and could especially hurt the more than 60 million mutual fund shareholders. “Closed markets create panic. … That’s when investors get scared,” he said.

Similar sentiments were expressed by the officials appearing with Levitt: Treasury Undersecretary John D. Hawke Jr., Federal Reserve Gov. Susan M. Phillips and Brooksley Born, chairwoman of the Commodity Futures Trading Commission.

Phillips went so far as to suggest the idea of never using trading halts after 2:30 p.m., 90 minutes before the close on the New York Stock Exchange.

But Levitt said a 20 percent slide in the Dow average late in the trading day would be “destabilizing” and the market would need to close for the day under that scenario.

Three of the four members of the subcommittee who attended the hearing agreed with the officials that circuit breakers should only be tripped in extreme market circumstances.

“There is nothing so destabilizing as not having a market,” said Sen. Phil Gramm, R-Texas, the panel’s chairman.

But Sen. Lauch Faircloth, R-N.C., opposed the exchanges’ plan, saying he would prefer circuit breakers to kick in after smaller market drops - losses of 5 percent and 10 percent in the Dow average as opposed to the proposed 10 percent and 20 percent.

“We simply need the constraints,” Faircloth said, asserting that the circuit breakers give a “stability to the market that isn’t coming from anywhere else.”

Besides shutting down the markets when the blue-chip average drops 20 percent, the exchanges’ proposal also would end trading for the day if the Dow falls 10 percent after 2:30 p.m. Trading would be suspended for one hour if the Dow drops 10 percent before 1 p.m. and for a half-hour if the decline is between 1 p.m. and 2:30 p.m.

Currently, trading is suspended for a half-hour if the Dow drops 350 points and for one hour if the index loses 550 points. The change not only would raise the threshold for the circuit breakers, but also would widen the distance between the two triggers and lengthen the time the market remains shut down.

The current triggers have been criticized as being too easy to trip and having the potential to aggravate selling - rather than acting as a brake. At current market levels, the new triggers would be activated at point drops of about 771 and 1,542 in the Dow.

The Dow plunged 554 points on Oct. 27, in a selling spree some said was aggravated by a half-hour trading halt when the blue-chip average had fallen 350 points. When trading resumed, the freefall intensified and, within 25 minutes, trading was halted for the day when the 550-point circuit breaker was passed.

A change in the circuit breakers would be the second in two years and the third since the mandatory pauses were implemented in response to the October 1987 market crash. They were designed to slow the plunge in the event of another wrenching sell-off.

Tags: business

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