Collars Put Stock Market On Short Chain Limits Set In 1987 Don’t Fit A Dow That Has Doubled In Value

Besides giving investors heartburn, the sharp market swings in recent days show that rules aimed at preventing a 1987-style market crash are out of date, analysts say.

So-called “circuit breakers” were designed by the New York Stock Exchange and Securities and Exchange Commission to slow the market’s plunge through a series of increasingly tough trading restrictions. For example, all stock markets shut down for an hour if the Dow Jones industrial average sheds 250 points in a day.

A 250-point plunge would have been a remarkable 12 percent decline in October 1988 when the rule was first tested on the NYSE.

Today, because the market has more than doubled in value since 1988, the Dow need fall only about 4.5 percent before triggering a trading halt.

On March 8, the nation’s stock markets were a half-percentage point away from shutting down when the Dow was off 217.49 points with just 45 minutes left in the trading day. The market later closed down 171 points. To some, that was too close of a call for a shutdown that would not have let trading resume until after the weekend.

“We believe that 250 points was fine on the Dow in 1987 but you should look at in light of where the Dow is today,” said Marc Beauchamp, spokesman for the Nasdaq Stock Market. “That collar is too tight.”

The NYSE defends the circuit breakers as “very effective” and say they are continually reviewed after discussions with floor traders and individual investors. Edward Kwalwasser, executive vice president of the NYSE, challenged those who say a 250-point drop isn’t as meaningful any longer.

“It may be a smaller percentage than it was in the past, it is still a major move,” Kwalwasser said.

“One hundred points, even though its currently a small percentage, has a very big impact on confidence,” Johnson said.

Richard Lindsey, the SEC’s market regulation chief, was open to discussing possible changes in the circuit breakers.

On the NYSE, a 50 point rise or fall in the Dow will limit computerized program trading in companies listed in the Standard & Poor’s 500, generally the 500 biggest U.S. stocks.

A second tripwire: If the stock futures market takes a tumble - a 12-point fall in the S&P 500 stock futures contract - then there’s a five minute delay on computerized orders for S&P 500 stocks.

A one-hour trading halt for all stock markets, including Nasdaq, occurs if the Dow falls 250 points, and a two-hour halt occurs after a 400 point fall in the Dow. Neither trading halt has been called.