SEC Loosens Collar on Dow Movement

The Securities and Exchange Commission approved changes Thursday to the New York Stock Exchange’s trading collars, which will allow the Dow Jones industrial average to rise or fall 2% before restrictions on certain computerized “program” trading are imposed.

The changes will take effect Tuesday. The current rule, drafted in the wake of the crash of 1987, imposes restrictions when the Dow average rises or falls 50 points. Regulators and traders have complained that the curbs kick in too often.

“What was meant to be a rare circuit breaker turned into a daily nuisance,” said James Angel, a finance professor at Georgetown University.

In 1991, the first full year it was used, the collar was set off just 20 times. But in 1998, it was imposed 366 times in 252 trading days.

Under the new rules, the Dow must move at least 2% before limits on “index arbitrage” set in.

The collar will initially kick in when the Dow rises or falls 180 points.

The percentage values would be translated into specific point levels at the beginning of each quarter, based on the average closing value of the Dow the previous month.

The NYSE on Nov. 5 proposed raising the trigger-point for the collars, which are supposed to slow market declines by forcing traders to wait until shares rise before executing orders involving groups of stocks and equity index futures. This “index arbitrage” occurs as traders exploit differences between the futures market in Chicago and the stock market.