May 11, 2010
Those elusive circuit breakers...
The Dow's harrowing 900-point intra-day decline last Thursday should serve first and foremost as a reminder of the futility of circuit breakers. These artificial brakes on an entire market are triggered by a 10% decline as gauged by the daily market close from the prior quarter. Thus, in a Bull Market, breakers - which are calculated and re-set by the exchanges themselves - contemplate a perpetuation of a Bull Market. With the trigger point set so high, NYSE breakers have not been called into action once in the past two years - not last Thursday (when the breaker level was 1,050), nor during the stormy days of the Fall of 2008 (e.g., 778 point decline on 9/29, while the trigger was 1,100).
One can only hope that this week's emergency meetings between the SEC Chair and the major exchanges help to shed some light on not only the volatility of trading now dispersed among various exchanges but also the cryptic world of these market centers themselves. For example, about a quarter of all activity on the NYSE represents program trading, defined as "portfolio strategies involving the purchase or sale of 15 or more stocks having a total market value of $1 million or more." Of course, the overwhelming majority of NYSE trading is now effectuated via computer. Moreover, exchanges have lost a ton of trading volume in their individual listings to other exchanges and market systems. Further, round-the-clock trading (which might prevent the drama of panic selling at the opening or at the close) still seems years off. Details such as these should be communicated and discussed routinely, not just when the sky is literally falling.
May 11, 2010 | Permalink