SEC Will Allow Trading Halts if Prices Plunge
In its most important reform since the stock market collapse, the Securities and Exchange Commission on Tuesday approved an experimental program that is supposed to provide temporary relief for investors when stock prices head into a wild fall.
The commission, acting on the eve of the first anniversary of Black Monday, approved a one-year test of “circuit breakers” that would halt trading in all stocks on all U.S. exchanges for at least an hour if prices on stock or futures markets fall by specified amounts. The halts begin once the Dow Jones industrial average has fallen 250 points.
The SEC reform program also includes features intended to give a slight edge to small investors in a tumultuous market and to ease the impact of the computer-directed “program trading” that is still blamed by many for worsening last year’s collapse.
The “circuit breaker” plan remains highly controversial among some in the industry, who assert that halting trading only panics investors and increases their desire to sell. And others maintain that the plan doesn’t kick in until the market is already well into a fall.
The program, formally proposed in July by the New York Stock Exchange and the Chicago Mercantile Exchange, may be put into effect by the stock and futures exchanges as early as Thursday, exchange officials said.
Such “circuit breakers” were recommended by two groups appointed by the President that studied the crash, the so-called Brady Commission and the White House Working Group that followed it.
Gets Wide Praise
The plan has been widely praised as an example of a new spirit of cooperation among the exchanges, which were criticized by some analysts of the crash for failing to work closely together last October. The securities industry and regulators also fervently hope the agreement will reassure the frightened investors--large and small--who have withdrawn from the markets since the Dow Jones industrial average fell a record 508 points in one day.
“We’ve got to convince people the markets are not unsafe, and I think this is going to help,” said John W. Bachmann, chairman of the Securities Industry Assn. and managing principal of the Edward D. Jones brokerage in St. Louis.
Want Earlier Halt
But some critics argue that the trading halt will be too little, too late if the markets begin to tumble. After a 250-point drop in the Dow, “the cows are already out of the barn,” Jeffrey B. Lane, president of the Shearson Lehman Hutton brokerage firm, said in a recent interview.
Others have insisted that halting trading only builds up pressure to sell in another market or when U.S. exchanges reopen. They point to the experience of the Hong Kong market, which halted trading during the crash and saw prices plummet further when it reopened.
Even supporters of the plan acknowledge that because of the infrequency of major slides, the “circuit breakers” probably won’t be tested in the year-long experiment.
Still, a spokesman for the Chicago Mercantile Exchange, the big futures market, said the program was “clearly the most important” reform step taken since the crash.
The plan will replace another reform proposal that was intended to minimize the destabilizing effect of program trading on the markets. This reform, which expires at the close of trading today, prohibited program trading through the New York Stock Exchange’s high-speed computer system on days when the Dow had fallen or risen at least 50 points.
Can Avoid Computer
Most in the industry judged that effort a failure, since program traders could carry out their trades without using the exchange’s computer hookup.
Specifically, the new plan will halt trading in stocks, stock-index futures and stock-index options for one hour if the Dow Jones industrial average falls 250 points in a day. The markets will then be closed for another two hours if the Dow’s drop reaches 400 points. Similar trading halts will be put into effect if there is a fall of a similar magnitude in a key stock-index futures contract, the Standard & Poor’s 500-stock index.
Stock-index futures and options are, in effect, bets on the price of a group of stocks in the future.
In recent years, big investors such as insurance companies and pension funds have traded these three kinds of investments at lightning speed and huge volume at markets across the country. The Brady Commission found that such trading had, in fact, transformed far-flung exchanges into one market, and it called for “circuit breakers” that would simultaneously stop all trading in a crash.
The theory behind the trading halt is that it would give investors time to assess their financial positions, learn more about the entire market and, in so doing, persuade them to stop selling.
‘Buildup of Orders’
During the crash, Bachmann said, many small investors wanted to buy stocks at the very low prices they then commanded. “We had a huge buildup of orders from people who wanted to buy,” he said. “But they didn’t have the information they needed in that environment. A halt would give them that information.”
Another feature of the plan will give a brief time advantage to small investor’s orders that are sent through the New York Stock Exchange on days when the Dow Jones average has moved 25 points from the previous day’s closing price. On such days, orders of 2,099 shares of stock or less would be delivered ahead of larger orders through the exchange’s computer system to the trading floor.
