Though investors have endured some pretty terrible Dow performances in recent weeks, including another 300-plus point on Friday, the downward spiral has not gone far enough to halt trading on Wall Street.
New York Stock Exchange rules currently call for circuit breakers to interrupt trading only in cases of extreme drops of more than 1,100 points. Such breaks, established after the Black Monday crash in 1987, are intended to help investors step back and assess what is happening.
The thresholds for market timeouts are set quarterly, using the Dow’s average closing price for the previous month, and activate in increments of 10, 20, and 30 percentage point drops.
For the current fourth quarter, if the Dow drops 1,100 points before 2 p.m., trading stops for an hour. If such a drop happens between 2 p.m. and 2:30 p.m., trading halts for a half hour. After 2:30 p.m., the 1,100-point threshold expires.
There is also a 2,200-point mark. If the Dow falls by that much before 1 p.m., trading stops for two hours. Between 1 p.m. and 2 p.m., a 2,200-drop causes an hour halt. After 2 p.m., trading ends.
If the Dow falls by 3,350 points, trading stops for the rest of the day.
The circuit breakers have been activated twice, both times in late afternoon trading on Oct. 27, 1997, when the Dow eventually closed off 554 points, or 7.2 percent. Trading that day was halted under previous triggers, which were later revised in 1998. The current triggers have never been hit.
If the president approves, the Securities and Exchange Commission can suspend trading for up to 90 days.
The prospect of a halt to trading seemed possible yesterday morning after Dow, Nasdaq and S&P 500 futures contracts declined 5 percent, meeting a threshold set in May 2001 and triggering a suspension in futures markets. It was the first time that the “down limit” had been reached since the 5 percent mark was set in May 2001.
That kind of snowball effect can offset a circuit breaker’s usefulness as a tool for cooling off.
Even so, for some investors, triggering the circuit breakers could mark a bottom to the market. Every day they go unused is another day for traders, like healthy people wondering when they’ll catch a flu bug that’s going around, to worry whether the worst is yet to come.
Total volume in the New York Stock Exchange yesterday was only slightly above the six-month average, and the atmosphere on the floor was calm throughout the trading session, belying the frenzied sell-off overseas and in the futures market.
“Maybe it’s like with kids: quiet is bad,” said Stephen Wood, senior portfolio strategist at Russell Investments. “But I don’t know that I’m a firm believer in the capitulation theory. Do you need to have some huge crescendo to end the opera? I don’t know that you do.”