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Why didn’t the circuit breakers hit Monday?

October 1, 2008 7:05 am

Do you remember a time that when the market was down 100 points or so the trading collars would “kick in” to provide a relief from any unusual movement? How about the often discussed recession of the up-tick rule for short selling?

Each of these mentioned (and surely others) are all in the investing hall-of-fame, retired and all but forgotten. They served a purpose in their time, but have been relegated to the scrap heap with other ideas that had “no verifiable” benefit.

So, now, we are stuck with a only a 1/2 hour trading stoppage for a 10% drop (see chart below). Notice the lack of a 2-minute rule as we have with football for market declines after 2:30pm for a mere 10% drop. Good news though… if the DJIA is down 20%, the market will close if it is after 2:30pm.

Do you think the removals of the trading collars and the up-tick rule have helped to exacerbate the recent market gyrations? Thanks to the WSJ for this excellent graphic…

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Written by Andrew Horowitz · Category(s) Markets    |  Tags:   

2 Responses to “Why didn’t the circuit breakers hit Monday?”

  1. Erik Ahrsjo on October 1st, 2008 7:36 am

    I hope they go away for good, it just extends the agony of waiting for the prices to drop to acceptable levels. Soon ordinary blue chip companies can be affordable again they have been to expensive for a long time. And especially since investment grade bonds can be had for a song right now stocks needs to be cheaper

  2. Jonathan Lawson on October 1st, 2008 7:56 am

    Rule 80A halts program trading during moves. I don’t like the rule, at least until we get the ability to short. The Gov’t has been tinkering with the market in such a way that it is not acting properly. There is less volume because the big institutional players are on the sidelines. Most have had rough year. They don’t know which gov’t rule changes are next. And there is little buying to support a price fall.

    For example: In a normal market the short seller would have two upward effects on the market.

    1) They would cover, and that would cause the market to rise
    2) They could get squeezed and cause the market to melt up.

    Neither is mechanism is working properly right now. It is actually creating MORE volatility due to the papercup theory.

    Papercup Theory – When there is not much weight (volume), the market gets blown around buy any gust. Up and down, side to side. A large player in the market can significantly impact share/index prices with a normal buy order. We usually see much of it during holiday weeks.

    Let’s not let the Gov’t “protect” us when it comes to the financial markets. They already screw the small guy with pattern day trading rules if you acct is below 25K. However, over 25K a person can intraday trade all you want. And they haven’t been vigilant in enforcement in acting against companies/individuals that create other market disruptions, other than lip service. i.e. COF

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