New stock circuit breakers would prevent another flash crash

Alisa Roth Jun 11, 2010
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New stock circuit breakers would prevent another flash crash

Alisa Roth Jun 11, 2010
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by Alisa Roth

New rules could go into effect today that put circuit breakers on stocks in the S&P 500. The rules are designed to prevent another “flash crash” akin to what caused the Dow to lose almost 1,000 points in under half an hour. Regulators say they still don’t know what happened that day, but they’re hoping to keep it from happening again.

The circuit breaker is essentially a time-out: if the price of certain stocks goes up or down more than 10 percent within five minutes, then trading in that stock will be stopped for five minutes.

Roderick Hills was chair of the Securities and Exchange Commission in the mid-70s.

He says circuit breakers like these may or may not actually prevent another flash crash. “They’re something that treats a symptom,” he says. “They don’t really deal with anything you would call a cause.”

That’s partly because we still don’t know what made it happen last time. There already are some circuit breakers in place, but the crash in May didn’t trigger any of them. David Ruder, who was chair of the SEC in the 80s, says trying a new kind of circuit breaker is a perfectly reasonable idea. “In the face of imperfect information, my choice would be to do something and see whether it has the effects you’d like.”

The trial period will go until the end of the year. After that, regulators will decide whether to make them permanent and whether to include more stocks.

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