2
Circuit breakers: Not just for electricity
The Dow plunges
To view this content, Javascript must be enabled and Adobe Flash Player must be installed.
TEXT OF STORY
Kai Ryssdal: I'm going to go out on a ledge here and make a market prediction for tomorrow. With less than half a day of trading coming on New Year's Eve it's probably safe to assume we're not going to see the crazy gyrations that made this Fall so stomach-turning. But volatility is still going to be center stage.
The New York Stock Exchange is going to announce its new emergency circuit breakers. That is, if the Dow Industrials fall by a certain amount, trading comes to a halt.
We asked Jeremy Hobson what it would take to shut things down in today's edition of the Marketplace Decoder.
Jeremy Hobson: Until tomorrow, here are the numbers: A drop of 1,100 points would shut down trading for an hour, if it happens before 2 p.m. Eastern. A 2,200-point decline before 1 p.m. would mean a two-hour halt. And a 3,300-point drop would send everyone home -- or perhaps to the bar -- regardless of the time. Those numbers are determined quarterly by the New York Stock Exchange. They're based on a percentage of the market at the time of the determination. David Henderson works the floor of the NYSE for his company, Raven Securities. He's glad circuit breakers exist.
David Henderson: If we didn't shut down, where would it go to? I mean, it really prevents a meltdown, so to speak.
Alan Valdes: Oh, without a doubt, we want those circuit breakers. Give people a rest. Stop and reorganize.
That's Alan Valdes of Hilliard Lyons.
Valdes: You know a lot of trading the last few months have been on emotions instead of fundamentals. So when you get a circuit breaker, you stop those emotions, everybody catches their breath and they can reorganize.
The NYSE circuit breakers have only actually been triggered twice, on the same day back in 1997. The world was in the midst of the Asian financial crisis.
On Marketplace that night listeners heard from a couple of traders who stood outside the exchange smoking cigarettes while the markets were closed.
Trader 1: It's basically to let everything, the system, catch up. Let all the work and all the paperwork catch up. Lets us reevaluate our position.
Trader 2: It gives people time to sit back, relax and see what's going to happen.
1997 was a lifetime ago in the world of trading. But the circuit breakers emerged out of market turmoil in 1987. That was two lifetimes ago technologically.
James Angel: Back in those days, people traded with people. And they had problems with printers jamming when they had printers that would print the order tickets.
Finance Professor James Angel of Georgetown University says circuit breakers are outdated, since most trading is now done electronically. And Angel says there's another problem with them.
Angel: A lot of investors who have orders to sell something by the end of the day don't know when the end of the day is going to be. So if they think that there is a chance that you're going to hit that circuit breaker, they may sell faster before the market closes, making the decline even worse.
Angel says a modern solution could be individual breakers for individual stocks, but he doesn't think any change is likely. A spokesman for the New York Stock Exchange confirms that prediction. He says the only change will be the routine updating of just how big a drop it takes to trigger circuit breakers. That number will likely come down dramatically tomorrow, because it's a percentage of the Dow's current levels, and the markets have lost a lot of ground this quarter.
In New York, I'm Jeremy Hobson for Marketplace.
About the author
Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead. Follow Jeremy on Twitter @jeremyhobson
Emotions vs fundamental, -very good question! Fundamentals say that a stock's price is determined by the dividend it gives. If you hold on to the stock, the profit the company gives you is called 'dividend'! Wall Street has managed to convince people that dividends are unimportant. So what are the 'fundamentals' that determine the 'Price of Google'? None! Google does not pay a penny to its stock holders. But a constant barage of news and articles creates 'emotions' in people who 'think' Google is worth keeping. Triggers are meant to do exactly the opposite of what the interview or Mr. Risdal claims. They are to prevent the 'fundamentals' from being exposed. There is only ONE single way Wall Street makes money, -people must buy and not sell. For most of wall street's profit comes not from trading commission, but from the traders selling their own stock (pump-and-dump). The purpose of media such as MarketPlace, sponsored by wall street, is to keep convincing people that they should buy and hold, regardless of the fall. But recently, many people were about to find out the true value of stocks, so wall street is adjusting its rules. Triggers essentially mean the stock market is no longer a free market, -you can buy but not sell at will, so when the stock price drop, you are stuck! This keeps the price artificially high, while the brokers get busy on the phone, cnn interview 'wise investors' and marketplace and other media aggresively work on those 'emotions' to get them back into the right 'mood'. But if you needed cash at that moment, -your stocks are worth paper. Wall Street is, if anything, not stupid, they want your money and its a one way street : )
Stocks are, to a large extent, a well organized ponzi scheme. Take Google for example. Since they don't pay a penny in dividend, their stock is just paper, any value is speculative (or Ponzi-value), being propped up by the demand for it from other speculators. Wall Street's biggest fear is that the individual investors will find this out. Try taking a million shares of Google to a bank and as for a loan for 100 dollars, -you will quickly find out what stocks really are. In a true 'free market', stocks are allowed to rise (total speculative gambling) as well as fall. But if it ever falls to its true value, many naive people who think stocks actually have some intrinsic value, will suddenly find out the truth, and it will be the end of the great ponzi-scheme of wall street. So, being very clever, Wall Street comes up with clever verbiage and invents 'triggers'. Essentially they mean if you want to sell Google and the price is dropping, we wont let you sell it! You will be stuck with paper. This will give time to the brokers to call you and convice you how great Google is, and Marketplace will publish articles on 'wise, long term' investment etc, all to prevent people from crashing the ponzi scheme. But since people are too naive to see this, for now Wall Street will continue to skim their wealth, -triggers will definitely help : )
Sanoran Triamehs
