SEC Agrees to Loosen Rules on Circuit Breakers for Stock Trading

The Securities and Exchange Commission on Friday agreed to loosen the stock markets’ so-called circuit breakers, the trading curbs that are intended to avert panic selling of securities.

According to rules that take effect immediately, the New York Stock Exchange, the Nasdaq Stock Market, the American Stock Exchange and other U.S. exchanges would halt trading for 30 minutes should the Dow Jones industrial average fall 250 points. Should the Dow fall by 400 points, trading would be halted for an hour.

The circuit breakers rule, established in 1990 in the wake of the October 1987 stock market crash, originally called for a one-hour halt in the event of a 250-point drop and two hours should the Dow fall 400 points.

Exchanges, led by the Big Board, proposed the shorter halts after some investors complained that the rules were too restrictive, though they’ve never been tested. Critics say the rules were imposed when a 250-point move represented about 10% of the Dow’s value. With the Dow industrials at 5,427 as of Friday, those levels were obsolete, they said.

Supporters of the new rules, including NYSE officials, say they would curb disorderly markets though they wouldn’t stop stock prices from falling. “A $6.6-trillion market is going to find its level,” NYSE Chairman Richard Grasso said.

The NYSE plans to reexamine the rules later this year, Grasso said. “I want to throw everything on the table,” he said in a meeting with reporters.

Grasso met with reporters at the end of the busiest week ever for the 204-year-old NYSE. A total of 2.486 billion shares changed hands on the exchange, about 6% more than the previous record of 2.35 billion, set in mid-March.

Trading didn’t exceed the capacity of the exchange, which can now handle as many as 2.4 billion shares a day, Grasso said. The NYSE plans to expand that capacity to as many as 3.2 billion shares, he said.

Grasso said one thing he doesn’t plan to change is the collar that curbs index arbitrage--buying or selling batches of stocks and offsetting the trades with futures contracts--whenever the Dow industrial average rises or falls 50 points.

Regulators enacted the curbs because index arbitrage was blamed for exacerbating the 1987 crash, when the Dow industrials lost 508 points, or 22%, in a day.

Investors have criticized the index arbitrage rules. In the last year, the 50-point collar was triggered dozens of times as the Dow surged. The collar kicked in seven times this week, exchange officials said.

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 changes, conform trading halts for stock index futures and options contracts to the changes made by the SEC.