Some of you might have heard the media mention last Wednesday that the NYSE imposed circuit breakers just before noon during the day's downslide.
When circuit breakers are triggered, it doesn't mean that an exchange is experiencing troubles with its lights. It also doesn't necessarily mean that individual investors like you and me should have trouble getting our orders filled.
The terminology can be misleading. A "circuit breaker" or "collar" generally refers to any method used by an exchange to avert panic selling during a large sell-off. These devices came into use to reduce market volatility and restore investor confidence after Black Monday, Oct. 19, 1987, when the Dow dropped 22.6%. The specified trigger levels are adjusted periodically by the exchanges to reflect market characteristics. The NASD follows the lead of the NYSE and halts trading in Nasdaq accordingly.
For this quarter, if the Dow declines 1,100 points, trading stops for one hour if triggered before 2:00 p.m., or for 30 minutes if triggered between 2:00 p.m. and 2:30 p.m. No halt is imposed after 2:30 p.m. If the Dow declines 2,250 points, trading stops for two hours if triggered before 1:00 p.m. or for one hour if triggered between 1:00 p.m. and 2:00 p.m., and the market closes if the condition occurs after that time. A 3,350-point decline closes the market for the day regardless of the time it occurs.
What actually occurred yesterday was a "trading collar" in NYSE jargon, imposed if the NYSE Composite Index (NYSE:NYA) swings either up or down 160 points. If that occurs, all index-arbitrage orders (buy orders in an advancing market, or sell orders in a declining market) of the S&P 500 stocks must be stabilized for the remainder of the day. Once the NYA moves back to within 80 points of the previous day's close, the collar is removed.
As you can see, the terminology can be confusing, and hasty media headlines may be misleading. Yesterday's trading collar really directly affected institutional arbitrageurs, not individual investors.
So next time you hear that breakers are imposed, check index levels and current trigger conditions yourself. Even if, like last Wednesday, the market doesn't reach the extreme circumstances whereby trades such as yours would be barred, you'd most likely be better off postponing the placement of your previously well-thought-out order -- especially if the market is moving against you.
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Fool contributor S.J. Caplan still can't locate the fuse box in her own house. She owns no stocks mentioned in this article.
