‘Circuit Breaker’ Proposed to Limit Markets’ Volatility : Halt Trading If Dow Drops 250, Reagan’s Working Group Asks
The Reagan Administration’s working group on last October’s stock market crash recommended Monday that trading in stocks and related financial products be simultaneously halted for one hour when the Dow Jones industrial average falls 250 points below its closing level of the previous day.
The “circuit breaker” proposal, which is expected to be put into effect soon by the New York Stock Exchange, regional stock exchanges and futures markets in Chicago, was contained in a report prepared by Treasury Department officials and federal financial regulators.
“The No. 1 priority for this working group has been to agree on actions . . . to protect the financial system against large market breaks,” Treasury Secretary James A. Baker III, who oversaw the panel, told reporters. “Volatile markets also may pose risks to investors, but this group agreed that risk to the financial system demanded priority attention.”
President Reagan established the working group to resolve disputes within the Administration over how to respond to the recommendations of a White House-appointed commission chaired by Wall Street investment banker Nicholas F. Brady.
Happened Only Once
The Brady Commission, which first recommended the idea of a “circuit breaker” system without spelling out how it should work, was established in the wake of Wall Street’s breakdown last Oct. 19, when the Dow industrials fell 508 points. That is the only time the average has ever dropped more than 250 points in one day’s trading.
The four-member Administration panel, which included Federal Reserve Chairman Alan Greenspan, did not endorse the commission’s other key recommendation that overall regulation of the securities and futures markets should be placed in the hands of the Federal Reserve.
The working group was unable to agree on whether tougher margin requirements should be imposed on futures traders in an effort to dampen fluctuations in financial markets.
But all of the members said the slightly higher margins adopted by the futures exchanges since last October are adequate to protect the nation’s credit system. Traders are now required to put up roughly 13% of the value of a futures contract in cash instead of the previous 10% minimum. By contrast, stock traders must put up at least 50%.
Face Trouble on the Hill
Securities and Exchange Commission Chairman David S. Ruder, the only member of the panel who supported stiffer margin requirements, also said he would continue to press Congress to give the SEC authority to regulate stock-related futures trading. The Commodity Futures Trading Commission now supervises the futures markets.
The Administration’s relatively modest recommendations, which appear to represent the most that representatives of the various financial markets would accept voluntarily, are certain to run into criticism on Capitol Hill. Several key lawmakers already have called for a variety of regulatory changes and have accused the White House of dragging its feet in the wake of the Brady Commission’s report.
Senate Banking Committee Chairman William Proxmire (D-Wis.), despite Greenspan’s opposition to an expansion of the Fed’s authority, has introduced a bill that would create a three-member committee to coordinate financial market regulation. Under the proposal, the Fed chairman would head a panel that also would include the heads of the SEC and the CFTC.
Instead, the Administration group recommended that it continue in operation to help with contingency planning. In addition to Greenspan and Ruder, the panel’s members are Treasury Undersecretary George D. Gould, its chairman, and Wendy Gramm, who chairs the CFTC.
The Administration working group designed its proposal on brief trading halts so that they would kick into effect only on the rarest occasions.
“The purpose of a circuit breaker is to capture one of those extraordinary events in history in which the market processes are perceived to be breaking down,” said Greenspan. “We certainly don’t wish to interfere in an orderly market which happens to be weak and dropping sharply. . . . Hopefully, we won’t see a circuit breaker trigger.”
The panel also recommended that trading should be halted for two hours if, after reopening, the Dow industrials fell a total of 400 points. Panel members said the stock and futures markets already are planning to implement the recommendation.
Brady generally praised the panel’s efforts. “I think this report is a good first step. They got about 80% of what is needed,” Brady said in a telephone interview. “I don’t think it should end here, though. The one thing that is still missing is margin requirements, which I think should be regulated by the Fed.”
But Robert F. Kirby, one of the members of the Brady Commission, criticized the panel’s recommendations as too timid.
“At 250 points, they must be out the window ledge by then,” said Kirby, chairman of Capital Guardian Trust Co., a Los Angeles investment management firm. “These are steps in the right direction, but I’d prefer to see experiments start with the kind of events not triggered by catastrophe. I’d rather see a 15-minute halt with a 100-point decline, for instance . . . so that these trading halts, timeouts and circuit breakers become a routine part of the marketplace.”
The Administration panel also recommended that “a significant number of important initiatives” should be implemented quickly to make further improvements in the operation of the credit, clearing and settlement systems in the markets.
The panel also pointed to several steps already under way that should help prevent future market breakdowns, such as the move by the New York Stock Exchange to increase its capacity to handle stock transactions to 600 million shares a day by next month and 1 billion shares by late 1989.
The market’s capacity at the time of last October’s crash was estimated at 400 million shares; the actual volume of 608 million was more than it could handle.
“Most of the crucial areas are already cured,” Greenspan said, “either by the market levels or by actions already taken.”
Times staff writer Paul Houston also contributed to this story.
