Fallout: The Financial Crisis

Circuit breakers: Not just for electricity

Jeremy Hobson Dec 30, 2008
Fallout: The Financial Crisis

Circuit breakers: Not just for electricity

Jeremy Hobson Dec 30, 2008


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.

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