Traders on the Pacific Exchange in downtown Los Angeles cheered with relief at 12:30 p.m. PST when an unprecedented halt in trading cut short a dramatic free fall in the Dow Jones industrial average that had nervous investors like Norma Lizaso rushing to check on their stocks.
"What happened?" wailed Lizaso, 56, as she punched up the three stocks she owns on a computer in a Charles Schwab brokerage office downtown. "My stocks are all down!"
Indeed they were. But while many traders and investors took the Dow's 7.2% plunge with remarkable calm, others were asking whether stock prices went down more than necessary.
For some financial experts, the most troubling event Monday was that trading in the nation's stock markets was artificially suspended for the first time ever under rules adopted after the Oct. 19, 1987, market crash, when the Dow declined 22.6%.
Designed to temporarily brake panic selling, these trading suspensions were activated twice during the furious market decline Monday, spooking some traders who called them "unnatural."
"The problem with trading halts is that if they create a sense of doom or historical uniqueness, they can draw more attention to the situation and make people act in a way they wouldn't act otherwise," said Alan F. Skrainka, chief market analyst at brokerage Edward D. Jones & Co.
Under rules known as "circuit breakers," the New York Stock Exchange halted trading for 30 minutes at 2:35 p.m. EST when the Dow had fallen 350 points. It closed for the day at 3:30 p.m. EST when it fell more than 550 points.
"The thing that's most scary about today is that we've never had these market stoppages," said Jack McSweeney, an Irvine stock trader with nearly 30 years of experience. "I don't like to stop trading for any reason." Mark Hagerman, a trader on the Pacific Exchange with the Seidler Cos., a Los Angeles brokerage, agreed.
"It's unnatural," he said. "I think in the long run it's going to make the market conditions more dramatic. People are going to sleep on this and may become even more concerned tomorrow."
William R. Johnston, president of New York Stock Exchange, told reporters in a news conference on the trading floor that the circuitbreakers had worked as designed.
"It gives everybody a chance to think, take some time out and deliberate, ask themselves whether the fundamentals have really changed," Johnston said.
"Trading was orderly, and the markets handled the record volume in stride," the Securities and Exchange Commission said in a statement.
Until Monday, the NYSE had never been halted because of market conditions. It was suspended on such occasions as a 1981 power failure, the 1981 assassination attempt on President Reagan and the 1963 assassination of President Kennedy, Johnston said.
Johnston would not conjecture about how the market would have performed Monday had there been no circuit breakers.
Some market professionals thought the halts might have worsened the situation, however, by creating a sense of urgency among sellers.
"I think [they] accelerated the decline," said Charles Bass, manager of the Nationwide Fund, a growth-stock mutual fund.
"When the market was down 300, people were accelerating their selling because they were afraid that the market was going to close before they got their trades in," he said.
Volume on the NYSE surged after the half-hour break, to around 800,000 shares per minute from less than half that amount.
However, the increase in trading doesn't prove that there was a selling panic, said Lawrence Harris, finance professor at the University of Southern California's Marshall School of Business.
"Remember, there was 30 minutes with no trading, but orders continued to flow in," he said. The orders that built up during the trading halt had to be executed along with the ones that arrived after trading resumed, boosting the volume, he said.
During the first halt in trading on the Pacific Exchange, many traders took time to order sandwiches, eat lunch, put their feet up and relax for 30 minutes.
But as the market bell sounded again, some traders became edgier and more frantic, resulting in some shouting, uncharacteristic for the usually quiet exchange.
"It's a meltdown, baby," yelled one trader, as the blinking lights signaling dropping stock prices seemed to fill the electronic screens at his post.
A loudspeaker warned traders: "Please be advised that if the Dow drops 550 points the exchange will be closed for the rest of the day." Most traders seemed relieved when that level was crossed, the final bell rang and they could go home early.
"We're in uncharted waters as far as these kinds of circuit breakers," said Rad Artukovic, a Pacific Exchange trader, who calmly crunched on cut carrots and celery as the market dropped. "So far, it seems they worked in that they gave people time to calm down."
Amid the turmoil, there were plenty who insisted they were buying--or at least not bailing out. Indeed, there was a good deal of evidence that individual investors were unfazed by Monday's steep plunge.
When 28-year-old Matthew Farrand of Claremont, Calif., realized the markets were tumbling Monday, he called his father, then his fiancee. The graduate student and landscape architect wasn't panicking--he was "scrounging up some money" so he could add to his $70,000 portfolio.
Scott Carhart, 35, said he sold all the single stocks he owns, such as IBM, early Monday, so he could buy more later in the week.
"I was able to get out early and cut some of the losses," said Carhart. "But I'll probably turn right around and put it back into the market on Wednesday." Jim Robertson, 24, held onto his shares of Apple computer Monday and was encouraged to see the stock go up--the only stock in the entire S&P; 500 index to rise.
"Apple is a winner and I'm holding onto it," said Robertson. "I'm in this market for the long term. If I wanted to go short term I'd be in Las Vegas."
The number of calls coming into mutual fund call centers jumped anywhere from 10% to 30% on news of the market's sharp decline. For the most part, fund officials said, the increase in calls wasn't driven by investor panic, but by an interest in buying stocks at a lower price.
"The No. 1 type of transaction we saw were telephone purchases into existing funds," said Chrissy Snyder, vice president of public relations at the Denver-based Janus Fund, one of America's largest mutual fund groups.
Craig Reynolds, a Van Kasper & Co. broker in Newport Beach, said the downturn hasn't spooked his clientele of affluent individuals, who aren't rushing to sell stocks. Indeed, some clients were looking for buying opportunities.
"A guy I just got off the phone with said: 'Hey--you're either a big dog or you're on the fence. And we be big dogs.' "
Gunter Hagen, a retired physicist in Malibu, is a definite big dog--he's considering where to invest some of the $100,000 he has set aside in cash.
"This is a major event, but I don't think anything has changed in the economy. Everything still looks beautiful," he said. "My philosophy is basically buy and hold, and I don't think I'll change that."
Investment experts credit mutual fund holders' calm reaction to the Dow's drop to a greater level of awareness about the contents of their portfolios.
Julie Sulser Stav, 44, a Calabasas financial planner who has set up more than 30 women's investment clubs, said she did not have to talk even one of the 1,000 women members out of selling. All of her investment clubs held their stock positions on Monday, convinced the fundamentals of those companies were still healthy, Stav said.
"I'm so proud of them," she said after fielding more than 100 calls Monday, compared to three or four on a normal day. "Nobody was crying on the phone. They kept saying: 'This is an intermediate correction, right? This is like having a little earthquake so we don't have the big one, right?' " Stav said.
Most of her members--who range from teenagers to grandmothers--joined these clubs during the boom of the last two or three years, so her clients had little or no experience with a massive nose dive. "It's a reality check," Stav said.
Even so, the lines were long at lunchtime at Charles Schwab & Co in downtown Los Angeles, with many investors leaving work to drop by to check on their stocks.
"I was having a wonderful lunch until I heard what happened," said Joan Jones, 40, who owns a combination of single stocks and mutual funds. "I'm not about to sell yet though."
"People say they are in it for the long term until there's a big downturn," said Mark Rastello, an investment specialist at Charles Schwab.
Or as Norma Lizaso put it, "I'm not selling--what comes down must go up."
Vrana and Kaplan reported from Los Angeles and Mulligan from New York. Also contributing to this report were Jennifer Oldham in Los Angeles, Barry Stavro and Julia Scheeres in the San Fernando Valley, and Leslie Earnest and E. Scott Reckard in Orange County.
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Trading was halted for the first time, a safeguard used to slow steep declines.
2:35 EDT: Trading halted for 30 minutes
3:30 EDT: Trading closed early for day
Source: Bloomberg News