CURBS someone was asking about them the other day. Here's this:
worldfinancenet.com
Trading Curbs
What they mean to the market
Alexander Frauenfeld
Associate Analyst
11/3/99
On recent choppy trading days it has been common to hear that ?curbs? are in. This announcement lets you know that the
New York Stock Exchange has activated trading curbs to settle the market down.
Trading curbs are a mechanism the exchange employs to calm the market when it is moving too fast to maintain a
reasonable balance of market orders. When the curbs are in place, the market stops accepting floor trades. The
outstanding orders are crossed until the imbalance is corrected and then there is a "cooling off" period of X amount of
minutes. Afterwards, the market is reopened for floor trades and movement is monitored. If the limits are once again
exceeded, the curbs are re-activated.
Curbs came about as a result of the stock market crash of October 19, 1987. The DOW fell 508 points (22%) that day, as
computer programs set up to sell shares at a given price level were triggered by a general downturn, which led to
snowballing losses. In general, curbs are mechanisms aimed at averting panic selling of securities. Out of this experience,
the NYSE wrote Rules 80a and 80b in 1988, which restrict trading depending on how far the DOW industrials fall or rise.
The original Curbs were triggered when the DOW gained or lost 50 points in intraday trading. Trading Halts, or circuit
breakers, were triggered after a 350-point move.
Trading halts are the ultimate trading curbs, as they literally halt all active trading on the market. Halts take effect if the
DOW falls 10, 20, or 30 percent in a single trading day, and last for one hour, two hours or for the remainder of the day,
respectively.
As the DOW began taking much more dramatic swings in the 1990s, these constraints were changed. By February 1999,
curbs had changed to reflect, on a quarterly basis, a 2% change in a single session, based on the average closing value of
the DOW for the last month of the previous quarter, rounded down to the nearest 10 points. The New York Stock Exchange
has today (November 3, 1999) revised its curbs on program trading to kick in when the Dow Jones Industrial Average rises
or falls 2 percent. The curbs go into effect when the Dow average rises or falls a certain number of points from the previous
day's close. The percentage will be calculated quarterly. In English, that means at current levels a 176-point decline or rally
will set off the curbs. Look for them to come out regularly in the coming weeks.
With Curbs, the NYSE has found a way to dampen wild trading activity. However, curbs and especially halts simply slow
the market down in the hope it will not drift further in the wrong direction when normal trading resumes. If investors are
convinced they need to sell, the dawning of a new day will see a further slide. It is therefore not a terribly sophisticated
solution. Curbs would be more useful if they could be targeted towards a particular sector. For example, if the technology
stocks are dumping, it would be nice to curb these to stem the carnage, but not punish the rest of the market at the same
time.
Program Trading Effects
The sudden moves that unleash curbs are generally caused by Program Trading, which can shut the market down for quite
some time. ?Program trading? is a generic term used to describe a type of trading in securities. It usually consists of
trading stocks on the New York Stock Exchange along with their corresponding options traded on the Chicago Board
Options Exchange or the American Stock Exchange; or it can be the trading of the Standard & Poor's 500 Index
commodity futures contracts, traded on the Chicago Mercantile Exchange. Program trading of these items is based purely
on their price in relation to each other, on a predetermined basis. It has nothing to do with any fundamental causes, such
as an individual company's earnings, dividends, or growth prospects, or an overall economic trend such as interest rate
movements, currency fluctuations, or governmental or political actions.
The restrictions cover two types of trading: individual stocks and "index arbitrage," where traders look to profit from
temporary price discrepancies in the same or equivalent securities. When a curb is in place, program selling of S&P
stocks can only take place on an ?up tick?, which occurs when a transaction is executed at a price higher than the last
trade. Also, buying is only permitted on downticks. |
