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To: Cactus Jack who wrote (2530)	7/20/2002 6:04:26 PM
From: stockman_scott	Respond to of 89467

Subject: Exchanges - Circuit Breakers, Curbs, and Other Trading Restrictions invest-faq.com Last-Revised: 25 Jul 2002 Contributed-By: Chedley A. Aouriri, Darin Okuyama, Chris Lott (contact me), Charles Eglinton A variety of mechanisms are in place on the U.S. exchanges to restrict program trading (i.e., to cut off the big boy's computer connections) whenever the market moves up or down by more than a large number of points in a trading day. Most are triggered by moves down, although some are triggered by moves up as well. The idea is that these curbs on trading, also known as collars, will limit the daily damage by restricting activities that might lead towards greater volatility and large price moves, and encouraging trading activities that tend to stabilize prices. Although these trading restrictions are commonly known as circuit breakers, that term actually refers to just one specific restriction. These changes were enacted in 1989 because program trading was blamed for the fast crash of 1987. Note that the NYSE defines a Program Trade as a basket of 15 or more stocks from the Standard & Poor's 500 Index, or a basket of stocks from the Standard & Poor's 500 Index valued at $1 million or more. Trading restrictions affect trading on the New York Stock Exchange (NYSE) and the Chicago Mercantile Exchange (CME) where S&P 500 futures contracts are traded. When these restrictions are triggered, you may hear the phrase "curbs in" if you listen to CNBC. Here's a table that summarizes the trading restrictions in place on the NYSE and CME as of this writing. The range is always checked in reference to the previous close. E.g., a move of up 200 and down 180 points would still be an up of 20 with respect to the previous close, so the first restriction listed below would not be triggered. Any curb still in effect at the close of trading is removed after the close; i.e., every trading day starts without curbs. Note that the "sidecar" rules were eliminated on Tuesday, February 16, 1999. Restriction Triggered by NYSE collar (Rule 80A) DJIA moves 180 points CME restriction 1 S&P500 futures contract moves 2.5% CME restriction 2 S&P500 futures contract moves 5% CME restriction 3 S&P500 futures contract moves 10% NYSE circuit breaker nr. 1 DJIA moves 10% NYSE circuit breaker nr. 2 DJIA moves 20% NYSE Circuit breaker nr. 3 DJIA moves 30% Now some details about each. NYSE Collar (Rule 80A): Restrictions on program trading This restriction is triggered if the Dow Jones Industrial Average (DJIA) moves up or down by 210 points (for 1Q01). If this trigger occurs, program trading curbs are put in effect. Essentially a key computer is turned off, so program trading must be done "by hand." This rule is also known as the "uptick downtick rule" (more formally: index arbitrage tick test) because it restricts sells to upticks and buys to downticks. In other words, when the market is down (last tick was down), sell orders can't be executed at lower prices. In an up market (last tick was up), buy orders can't be executed for higher prices. This collar is removed when the DJIA retraces its gain or loss to within 100 points of the previous close. CME Restrictions Trading in the S&P500 futures contract is halted just for a few minutes if the prices moves 2.5%, 5%, or 10% from the previous close. Because restrictions on the NYSE effectively shut down trading in this futures contract, there is little need for additional restrictions on the CME. NYSE Circuit Breakers These restrictions are also known as "Rule 80B." The first version of this rule, adopted in 1988, set triggers at 250 DJIA points and 400 DJIA points. These restrictions are updated quarterly to reflect the heights to which the Dow Jones Industrial Average has climbed. 10% decline (1050 points for 1Q01) The first circuit breaker is triggered if the DJIA declines by approximately 10%. The restrictions that are put into place -- if any -- depend on the time of day when the circuit breaker is triggered. If the trigger occurs before 2pm Eastern time, trading is halted for 1 hour. If the trigger occurs between 2 and 2:30pm Eastern, trading is halted for 30 minutes. If the trigger occurs after 2:30pm Eastern time, no restrictions are put into place. (This restriction was first used during the afternoon of 27 Oct 97.) If the Dow Jones rallies 10%, there is no restriction, because program buying and the accompany rally is always perceived as "good." 20% decline (2150 DJIA points for 1Q01) The second circuit breaker is triggered if the DJIA declines by approximately 20%. The restrictions that are put into place again depend on the time of day when the circuit breaker is triggered. If the trigger occurs before 1pm Eastern time, trading is halted for 2 hours. If the trigger occurs between 1 and 2pm Eastern, trading is halted for 1 hour. If the trigger occurs after 2pm Eastern time, the NYSE ends trading for the day. There is no trading halt if it rallies 20%, as that would be perceived as "very very good." 30% decline (3200 DJIA points for 1Q01) The third circuit breaker is triggered if the DJIA declines by approximately 30%. The restriction is very simple: the NYSE closes early that day. There is no trading halt if it rallies 30%, as that would be perceived as "the best thing that ever happened in the history of the world." The circuit breakers cut off the automated program trading initiated by the big brokerage houses. The big boys have their computers directly connected to the trading floor on the stock exchanges, and hence can program their computers to place direct huge buy/sell orders that are executed in a blink. This automated connection allows them to short-cut the individual investors who must go thru the brokers and the specialists on the stock exchange. Statistical evidence suggests that about 2/3 of the Mar-Apr 1994 down slide was caused by the program traders trying to lock in their profits before all hell broke loose. The volume of their trades and their very action may have accelerated the slide. The new game in town is how to outfox the circuit breakers and buy or sell quickly before the 50-point move triggers the halting of the automated trading and shuts off the computer. Here are sources with more information: Press releases from the NYSE on circuit breakers nyse.com Definition from the NYSE's glossary (look for the term "Circuit Breakers") nyse.com Equity index price limits from the CME: cme.com