Sec Approves Changes In Market’s ‘Circuit Breakers’
The Securities and Exchange Commission on Friday agreed to loosen the stock markets’ so-called “circuit breakers,” the trading curbs that are aimed at averting panic selling of securities.
It’s the first time the SEC altered the circuit breakers since the curbs were imposed after the October 1987 stock market crash.
Simply put, the circuit breakers are designed to slow the market’s plunge through a series of increasingly tough trading restrictions. For example, all stock markets are required to shut down for an hour if the Dow Jones industrial average sheds 250 points in a day. A two-hour halt occurs after a 400 point fall in the Dow. So far, such action hasn’t been necessary.
Under the SEC’s action:
-Trading will be halted for 30 minutes instead of an hour when the Dow falls 250 points or more.
-Trading will be halted for one hour instead of two when the Dow falls 400 points.
And the SEC eliminated plans for a brief after-hours trading session if either circuit breaker came late enough in the day to force temporary closing of the markets.
While neither trading halt has been imposed, the NYSE agreed to revisit the circuit breakers because the rising stock market has made the limits easier to trigger.
In 1988, when the NYSE first began testing the new trading curbs, a 250-point plunge in the Dow would have represented a 12 percent decline in the Dow average; today, a 250-point drop represents only a 4.4 percent decline.
The SEC’s rule changes apply to the New York Stock Exchange, the American Stock Exchange and other smaller auction markets, such as the Pacific Stock Exchange. The Nasdaq Stock Market informally obeys the trading halts as well, although it’s not required to.
In a related move, the Commodity Futures Trading Commission approved amendments to its trading halts on stock index futures and options contracts on the Chicago Mercantile Exchange, the Kansas City Board of Trade and the New York Futures Exchange.
The CFTC’s new rules, among other things, conform trading halts for stock index futures and options contracts to the changes made by the SEC.