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Is It Time For New Stock Market Circuit Breakers?
Another day on the stock market, another 5% drop, and another time the first paragraph of just about every story contains something along the lines of “market sees steep declines in the final hour of trading.”
I’m honestly getting sick of people driving the market down in the last hour of trading. Maybe it would go down anyways, but I somehow think that the end of the market causes some sort of panic that might not be there otherwise.
Currently the major indexes have ‘circuit breakers’ where the markets would actually shut down for a certain amount of time upon major declines. The NYSE, for example, will close down for 1 hour upon a 10% decline, and 2 hours for a 20% decline. This is to give people a chance to cool down, and would also interrupt many computer programs that trigger sells upon certain percentage losses. This is one of the leading causes for why the October 1987 market decline was so steep, and the circuit breakers would curb some of those.
What’s interesting is that the 10% circuit breaker will not kick in after 2:00 pm. It only kicks in earlier in the day. That’s opposite of what we see with most of the declines these days and wouldn’t even be helpful.
We haven’t had a decline of 10% in a day in the current market. But, we’ve certainly had weeks where it’s gone down that much or come darn close. Why are consecutive 4 and 5 percent declines any different than one steep 10 percent decline, I wonder?
I almost feel like there should be rules to shut the markets down early when it looks like last hour panic selling is about to ensue. I have a feeling that a lot of those sell hours wouldn’t seem so urgent in the morning.
I know many people will say that the markets are self-correcting, and that we shouldn’t interfere. But, I can’t think that such declines are healthy and I really do think that they’re fueled by forces that are not natural. I can’t bear to watch the final hour of trading be catastrophic and think that is natural behavior for the markets.
I really think that new circuit breakers should be considered. Crazy? Maybe. But a couple of years ago, would a $700 billion bailout to Wall Street been considered crazy? Probably. Would the Big Three automakers running out of cash been considered crazy? I think so.
It’s a crazy time and we need to consider everything we can to avoid this from turning into a complete panic.
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5 Responses to “Is It Time For New Stock Market Circuit Breakers?”
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Global Warming IS REAL said on November 21st, 2008 at 8:27 am
First of all, let me say that I have no idea what is going to happen in equities. However, I’ve heard from several notables in finance that there are very rough waters ahead. One has said the Dow could hit 5,000. Another has said we’ll have a corporate bankruptcy rate of 10% in the U.S. in 2009 (unprecedented - which will clearly not be good for equities). Another has said that we haven’t even begun to see the worst. I think at this point, if you have a job, then you should be thankful because you’re doing great. Is it smart to listen to “doom and gloomers?” Maybe…maybe not. They are mostly just guessing like everybody else. I mean, most of us still have to get up and go to work every day and just go on with life. I think that fact alone should tell you that there is always going to be an inherent optimism in the U.S. economy.
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Danielle said on November 21st, 2008 at 11:44 am
Do these same circuit breakers exist for when the market increases? Those numbers can be just as “driven” and “artificial” as market decreases.
I’m glad to know there is a circuit breaker for a 10% decline, but I think that is enough. The worry and fear that is driving this is a lot more long lasting than a 9-5 market day.
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Danielle, there are no circuit breakers for upsides. I think the reason being is that the circuit breakers are in place to address the types of declines seen from protecting losses. Many investors, individual and institutional, put stop limit orders that trigger a sell upon a certain threshold, which is designed to limit a loss to a certain percentage of the investment. History shows that most will not create similar ‘automatic’ orders for upswings, so you don’t generally see violent market reactions on the upside driven by computers executing automatic orders.
GWiR, I hope we don’t see DOW 5000 again! 7500 is bad enough!
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Global Warming IS REAL said on November 21st, 2008 at 1:22 pm
Has there been any meaningful research done by anybody (using lots of data) forecasting where the equities bottom will be? My sense is that we’re out on the tail (normal distribution) and that further reductions will be caused by corporate bankruptcies not yet “priced into” the market. I think all of the fear has driven down the market as far as one would rationally expect. It would seem that it would take more bad news that is not yet understood to push it lower. I think once major bankruptcy fears are gone, then we will have reached an equities market bottom. This all comes back to the credit markets needing to be fixed, and fast. Somebody smarter than me needs to figure out how to get companies money FAST so that they don’t have to shut their doors. I guess we can assume that whatever is left of the $700 B will be sufficient to provide the necessary credit and liquidity to minimize the number of U.S. corporate bankruptcies, thus allowing us to hit bottom by the end of 2009. Then, to me, it becomes a question of growth. How can we get the economy and equity markets growing again? My sense is that early 2010 may be the start of a really nice, long-term bull market.
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Global Warming IS REAL said on November 21st, 2008 at 1:35 pm
To limit losses and protect wealth, one could argue that “circuit breakers” should be put in place at 3%. Then again, if the market kept shutting down, it may drive more fear and cause more people to sell. I certainly agree that circuit breakers are needed.
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