September 01, 1998

How Do You Stop This Thing?
A Review of Market Circuit Breakers

In an attempt to head off one-day stock market tumbles of historic proportions and spare New York City the task of cleaning up scores of suicidal stockbrokers from its sidewalks, the Securities and Exchange Commission and the three major U.S. stock exchanges agreed to install so-called circuit breakers following a minor decline in share prices in October 1987.

Until recently, a 350 point decline in the Dow Jones Industrial Average would halt trading for thirty minutes, or enough time for most folks on the exchanges' floors to step outside and smoke a cigarette. A larger 550 point slide would result in a one hour break, presumably enough time for traders to say goodbye to their families and head for the elevators.

All of that changed, though, in April of this year. Now, trading stops for one hour if the Dow slides by 10% before 2:00 p.m. Eastern time. After 2:00 p.m., but before 2:30 p.m., the halt is for 30 minutes. If the index falls by 10% after 2:30 p.m., trading will not halt until the bell rings at 4:00 p.m.

A 20% decline before 1:00 p.m. warrants a two-hour break. After 1:00 p.m., but before 2:00 p.m., the trading halt is one hour. If the 20% trigger is tripped after 2:00 p.m., trading is suspended for the rest of the day.

If the Dow at any time declines by 30% or more, trading will halt for the rest of the day (and the SEC will buy any traders still left standing a free beer).

The percent declines are set quarterly using a byzantine equation this Fool cannot even pretend to understand. Instead, we dragged our crack statistician, Spanky the Wonder Pooch, out from under his usual resting place under TMF Bogey's desk and had him do the math.

The circuit breakers are based on the average closing price of the Dow for the month preceding the start of each calendar quarter. When given this equation, Spanky quickly dropped the shoe he was chewing on and spit out the following figures:

Average Dow Figure for June 1998 -- 8872.90 
           10% Decline in the Dow --  887.29 points 
           20% Decline in the Dow -- 1774.58 points 
           30% Decline in the Dow -- 2661.87 points
As of Sept. 1, 1998

--
Brian Graney (TMF Panic)

Related Links: For more information, check out the SEC press release on the new market circuit breaker levels. To read some Foolish perspectives on market drops and volatility, see our collection of articles titled The Market Move and the Task at Hand. To read what members of the Fool community think and to share your thoughts on the recent market drop, visit the Communion of Bears and Communion of Bulls message boards.