Preventing a Crash: When Stocks Stop Trading

Oct 6, 2008 7:47am

ABC News’ Charles Herman and Dan Arnall report: It’s unlikely that we’ll see the stock market triggering so-called “circuit breakers,” but just in case, here is a primer on what we can expect if there is a massive decline in the value of stocks. After the stock market crashes of October 1987 and 1989, the New York Stock Exchange instituted a rule — called Rule 80b — that provided for a stop to trading should there be a rapid and significant drop in the market. Each quarter, the NYSE publishes circuit-breaker levels at 10 percent and 20 percent of the average value of the Dow from the previous month. If the market drops beyond these points, trading stops for a specified time according to the time of day that the drop occurred. There are no “upside” circuit breakers. Here’s a look at the current circuit-breaker levels for the NSYE: In the event of a 1,100-point decline in the Dow Jones industrial average (10 percent) before 2 p.m., there would be a one-hour halt. If the drop happens between 2 p.m. and 2:30 p.m., there would be a 30-minute halt, and after 2:30 p.m., there would be no halt in trading. If there was a 2,200-point, or 20 percent, decline, before 1 p.m., there would be a two-hour halt in trading. Between 1 p.m. and 2 p.m., there would be a one-hour halt. And if such a drop happened after 2 p.m., the market would close for the day. (The market normally closes at 4 p.m.) In the event of a 3,300-point, or 30 percent drop, the market closes for the day regardless of time. Rule 80b has only been used once — on Oct.  27, 1997. On that day the Dow was down 350 at 2:35 p.m. and 550 at 3:30 p.m., shutting the market for the remainder of the day. Obviously, the trigger points were much lower at that time because the value of the Dow was much lower.

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