Trading curb

From Wikipedia, the free encyclopedia

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.

1 Circuit breakers
2 Program trading curbs
3 See also
4 References
5 External links

[edit] Circuit breakers

On the New York Stock Exchange, 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.

There are three circuit breaker levels as of the fourth quarter of 2007, based on changes in the Dow Jones Industrial Average:

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.

[edit] 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^[1]. The reason given for the rule's elimination was its ineffectiveness in curbing market volatility.