Exchanges Working Out A Circuit Breaker Agreement

Trader at the NYSE (AP)

After last Thursday's stock market plunge, six major stock exchanges will, in the words of the SEC, agree upon "a structural framework, to be refined over the next day, for strengthening circuit breakers." And the Wall Street Journal reports that they will "introduce temporary trading limits on individual stock moves."

The CEOs of NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc., Direct Edge Holdings LLC, International Securities Exchange Holdings Inc. and CBOE Holdings Inc. met with the SEC yesterday and apparently "Nearly all of the exchange officials agreed that the differing rules among the various stock markets about temporarily halting or slowing trading in individual stocks worsened the decline on Thursday." Columbia University law professor John Coffee explained, "You have to agree in advance on the point at which a short-term circuit breaker would be put in. We may want the circuit breaker to kick in on a 5 percent decline."

As the investigation into what caused the nearly 1,000-point decline continues, it appears that a trade in Chicago could have pushed things to the brink. According to the WSJ, "On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later."

Last night on The Daily Show, Jon Stewart wonder why these stock market plunges are called "perfect storms" when they seem to happen so often:

The Daily Show With Jon Stewart

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A Nightmare on Wall Street

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By Jen Chung in News on May 11, 2010 10:11 AM

Comments [rss]

Kojak

"isn't the stock market, to a degree, a measure of the health and value of our companies"

It is, but by itself it is not a completely accurate measure and is completely at the mercy of a Market that can at times make irrational & panic swings in the value of stocks.

fuboy

But doesn't this limit our ability to let a company's stock fail if it should? After the SEC charged Goldman with fraud, their stock dropped 13%. A proper reflection of what investors felt of the company in light of the accusations. That drop wouldn't have happened with this safeguard, from what I understand.

If this is true, it's a major restructuring of how the sock market works in order to maintain the illusion of success. Like I said earlier, just plugging holes in the Titanic.

fuboy

Wait, can I get a clarification - what's being put in place is a safeguard that a stock won't drop more than 5%? We're making sure no stock fails?

Hypothetical situation: It's discovered that AT&T's cellular service give people Hemorrhoids. Everyone wants to sell because the business is going to be hammered with lawsuits and might be in jeopardy. Except, after AT&T stock drops 5%, no one can sell because of this 'safeguard'. Now tons of people are stuck with stock that has a much lower value because people want to sell, but can't. They're stuck holding the new sub-prime mortgages of the stock market instead of being able to abandon the company that they've invested in.

I mean, isn't the stock market, to a degree, a measure of the health and value of our companies? And this is just a mask to make people think that everything's fine and dandy. Like the band playing on the deck of the Titanic - don't worry folks, we'll plug these leaks and be on our way in no time!

Politburo

History has shown that panic selling can have serious negative effects.

The safeguards temporarily stop or slow trading, but they do not prevent a stock's value from going to zero.

fuboy

So long as the safeguard doesn't interfere with a sale such as like the 13% drop of Goldman stock after the SEC allegations, I feel better. I just wonder how it will differentiate between legit sales and 'panic' sales. After all, all sales have a negative effect on the Market's value.

Still though, it's unsettling and makes me a bit nervous. Like we're creating new ways to support the system now because the market is too "big to fail".

On a side note, it still gets me that people worry about the DOW going under 10,000. For the majority of my life, the DOW was under that mark and now people treat it like the world will be in ruin if it falls below that magic number.

fuboy

Sorry about that, tried to edit but caused a double post.

fuboy

So long as the safeguard doesn't interfere with a sale such as like the 13% drop of Goldman stock after the SEC allegations, I feel better. I just wonder how it will differentiate between legit sales and 'panic' sales. After all, all sales have a negative effect on the Market's value.

Still though, it's unsettling and makes me a bit nervous. Like we're creating new ways to support the system now because the market is too "big to fail".

On a side note, it still gets me that people worry about the DOW going under 10,000. For the majority of my life, the DOW was under that mark and now people treat it like the world will be in ruin if it falls below that magic number.