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SEC Approves New ‘Circuit Breakers’ for Stock Trading

<i> From Bloomberg News</i>

The Securities and Exchange Commission has approved new “circuit breakers” that let stocks fall farther before trading is halted and close the market for the day only in extreme declines.

Starting Wednesday, market triggers generally will halt trading for an hour when the Dow Jones industrial average falls 10%, for two hours when the Dow falls 20%, and for the rest of the day when the average falls 30%. The rules are different if stocks plunge in the afternoon, when the plan makes it harder to stop U.S. stock trading.

At the beginning of each calendar quarter, the new trigger levels will be converted into point values, using the average closing value of the Dow average during the previous month, the SEC said.

The plan was developed because of concern that current circuit breakers cut off stock trading too quickly, and might spark panic selling rather than stemming it. The new trigger levels, the SEC said in a statement, “better reflect the original intent of the circuit breakers” by shutting markets only during “a severe one-day decline of historic proportions.”

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If the thresholds were in effect today, they would trigger trading halts when the Dow drops about 900, 1,800, and 2,700 points.

Currently, the New York Stock Exchange stops trading for 30 minutes when the Dow average falls 350 points and for an hour when it falls 550 points.

The changes were proposed by U.S. exchanges and the National Assn. of Securities Dealers, which coordinate trading halts during periods of extraordinary market volatility.

Circuit breakers were introduced in 1988 in the wake of the October 1987 stock market crash. At the time, the Dow average was at 2,100. It has more than quadrupled since then and the trading halt boundaries haven’t kept pace, even after being adjusted last year.

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Circuit breakers became an issue when they were tripped for the first time last Oct. 27 as the Dow fell 554 points, or 7.2%, closing U.S. markets early. Many brokers and regulators said that the prospect of a trading halt may have speeded the Dow’s decline rather than slowing it. The following day, the industrials bounced back with a 337-point rise, or 4.7%, on record volume.

Under the new rules, U.S. trading would be halted for the rest of the day only if the Dow falls 20% after 2 p.m. New York time or 30% at any point.

The markets would close for an hour if the Dow falls 10% before 2 p.m. New York time, and for 30 minutes if the industrials drop 10% between 2 and 2:30 p.m. The markets wouldn’t stop trading at all if the Dow crosses the 10% threshold after 2:30 p.m.

A 20% decline would trigger a two-hour halt if it happens before 1 p.m. New York time, and an hourlong suspension if it occurs between 1 and 2 p.m.

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The markets were closed Friday in observance of Good Friday.


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