Trade halts, intended to calm, may have had opposite effect 'Circuit breakers' get mixed reviews


Yesterday's halt in trading was intended to calm investors, but some experts said it actually did the opposite.

The first close of equities trading since President Ronald Reagan was shot in 1981 came at 2: 35 p.m., when the Dow Jones industrial average had lost about 350 points. When trading resumed a half-hour later, the Dow plunged another 200 points in 25 minutes, prompting another shutdown.

"All it did was give people a chance to line up their sell orders," said John Boo, head of Nasdaq trading at Ferris, Baker Watts Inc. "Look how much faster it plunged after the halt than prior to the halt."

The so-called "circuit breaker" rules were adopted by the New York Stock Exchange after the 508 point crash in 1987, to keep investors from rushing to the doors in an emotional frenzy.

Under the rules, a drop of 350 points halts trading in all stocks for 30 minutes, and a drop of 550 points stops trading for an hour. And when the Dow loses or gains 50 points from the previous day's close, computer program trades based on the stocks in the Standard & Poors 500 stock index are restricted.

White House spokesman Mike McCurry said the circuit breakers had worked well. "Those procedures and systems are working as they should, and the market trigger is apparently working as it should," he said.

But Boo and other investment experts disagreed. "The market was having an atrocious day," he said. "But everything was working pretty smoothly. It wasn't anything that people would be unable to handle. Then they halted trading. We ought to let the market sort out its own problems."

Richard Cripps, market strategist with Baltimore-based Legg Mason Inc., called the halt an impediment to trading. "Did it work here today at all?" he asked. "I can't see that it did."

One of Cripps' objections is that the circuit breakers promote gamesmanship. He said short sellers, who benefit from a drop in stocks, might actually have been rooting for a 350-point drop.

He said they may have believed that the halt would result in panic, spurring another selling wave. "That's what you don't like -- that people can 'game' it," Cripps said.

At the first break in trading, Cripps tried to reassure Legg brokers by telephone. "You never try to catch a falling knife," he told them. "We're all long-term investors."

Cripps also described the market as volatile, suggesting that brokers let their nervousness pass.

"This is a change in perception as opposed to a change in market fundamentals," he cautioned the brokers. "The market as we see it would have limits on the downside -- we'll say 7,000."

Cripps said the millions of individual investors still tend to view market downturns as buying opportunities, not as a crisis. "I don't see any change in that behavior," he said.

Peter Canelo, U.S. investment strategist with Morgan Stanley Dean Witter in New York, said the halt served only to scare investors.

"I had people running into my office and say, 'Oh no, they stopped trading,' " Canelo said. "As soon as they resumed trading, people went out and started selling."

But Canelo applauded the shutdown in program trading required by the circuit breakers. "If you don't do that, you exaggerate the decline," he said. "But whether stopping the market is a good idea, I don't know."

Wall Street investment experts said the halt stopped investors from buying stock, as well as selling. And they say it may have made some change their minds. "Some people just say, 'Get me out at any price,' " Canelo said.

Andy Brooks, head equity trader for T. Rowe Price Associates Inc. in Baltimore, was more generous about the circuit breakers. "I think the curbs were put into place to allow the market to take a pause, and survey the situation and encourage buyers and sellers to come together," he said. "The market structure has given a lot of thought to this."

Despite the fall yesterday, Brooks said investors didn't bolt for the door. "We didn't see a lot of panic," he said. "Buyers just left yesterday. They withdrew, but it was orderly."

Experts said that trading today may be the truest test of market. "The halt has allowed investors to think and regroup," Brooks said yesterday. "And we'll see what happens."

Circuit breakers

After the 1987 stock market crash, the New York Stock Exchange adopted new rules, dubbed "circuit breakers," intended to slow a market fall.

The rules are referred to as circuit breakers because they gradually inhibit trading during market declines, first curbing New York Stock Exchange program trades and eventually halting all U.S. equity, options and futures activity.

50 points: When the Dow Jones industrial average loses or gains 50 points from the previous day's close, computer-program trades based on the stocks in the Standard & Poor's 500-stock index are restricted. When the market is down, sell orders cannot be executed at lower prices. In an up market, buy orders cannot be executed for higher prices.

The curb remains in effect unless the Dow Industrials return to within 25 points of their previous close.

About 100 points: When the futures contract on the S&P; 500 index falls 12 points, which works out to about 100 points in the Dow, program trading orders are set aside for five minutes. If orderly trading does not resume in a stock, its trading is halted. The five-minute rule does not apply in the last 35 minutes of trading.

Also, all program market orders in S&P; 500 stocks entered via the NYSE's computer system are diverted to a separate file, also known as a "sidecar." After a five-minute delay, those trades that can be are paired off.

350 points: Trading in all stocks is halted for 30 minutes.

550 points: Trading is halted for one hour.

Pub Date: 10/28/97

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad