Trading curb


Trading curb

A trading curb, also known as a circuit breaker, is a point at which a stock market will stop trading for a period of time in response to substantial drops in value.

Circuit breakers

On the New York Stock Exchange (NYSE), one type of trading curb is referred to as a "circuit breaker." These limits were put in place after Black Monday in order to reduce market volatility and massive panic sell-offs, giving traders time to reconsider their transactions.

At the start of each quarter, the NYSE sets three circuit breaker levels at levels of 10%, 20%, and 30% of the average closing price of the Dow Jones Industrial Average for the month preceding the start of the quarter, rounded to the nearest 50-point interval. As of the fourth quarter of 2008, these levels are 1,100 points, 2,200 points, and 3,350 points respectively. Depending on the point drop that happens and the time of day when it happens, different actions occur automatically:

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from: 950 till: 1400 text:"1-hour halt" from: 1400 till: 1450 text:"½-hr~halt" shift:(0,1.5) from: 1451 till: 1600 text:"No halt"

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from: 950 till: 1300 text:"2-hour halt" from: 1300 till: 1400 text:"1-hour halt" from: 1400 till: 1600 text:"Market closes"

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from: 950 till: 1600 text:"Market closes"

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Trading curbs on Dow futures contracts traded on the Chicago Board of Trade are based on NYSE levels, with the exception that only the 10% threshold is in effect outside of regular NYSE trading hours, and is relative to the previous daily settlement price.

Program trading curbs

The NYSE formerly implemented a curb on program trading whenever the NYSE Composite Index moved 190 points or more from its previous close, and remained in place for the rest of the trading day or until the gain or loss had decreased to 90 or fewer points. This curb permitted program sales to be executed only on upticks and program buys on downticks. A program trade is defined by the NYSE as a basket of stocks from the S&P 500 where there are at least 15 stocks or where the value of the basket is at least $1 million. Such trades are generally computer automated. Since over 50% of all trades on the NYSE are program trades, this curb limited volatility by mitigating the ability of automated trades to drive stock prices down via positive feedback.

This curb was fairly common, and financial television networks such as CNBC often referred to it with the term "curbs in."

On November 7, 2007, the NYSE confirmed that the exchange has scrapped this rule as of November 2 [ [http://today.reuters.com/news/articleinvesting.aspx?type=bondsNews&storyID=2007-11-07T200321Z_01_N07543899_RTRIDST_0_MARKETS-STOCKS-CURBS.XML] Reuters report on trading curbs elimination ] . The reason given for the rule's elimination was its ineffectiveness in curbing market volatility.

ee also

*Stock market crash

References

External links

* [http://www.sec.gov/answers/circuit.htm Circuit Breakers and Other Market Volatility Procedures]
* [http://www.nyse.com/Frameset.html?displayPage=/press/circuit_breakers.html Circuit Breakers and Trading Collars] at the New York Stock Exchange
* [http://www.cbot.com/cbot/pub/cont_detail/0,3206,1560+8704,00.html Dow Contracts Price Limits and Trading Halts] at the Chicago Board of Trade
* [http://www.programtrading.com/curbs.htm Program trading curbs]


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