My own view on circuit breakers has always been that they should be applied, if at all, only in extraordinary situations, such as if the physical systems are overcome by the volume of transactions. In that case, circuit breakers might serve to allow the accounting and other systems to catch up.
There are those who have argued that a pause is appropriate to induce investors to think over the situation so that the markets will stabilize. But it seems to me that there is nothing so destabilizing as not having a market. I reject the idea that somehow we help the market by denying its existence.
There has been a tremendous technological improvement in our markets, and we are going to hear from representatives of those markets in our second panel. In fact, the accounting and processing problems that existed when we had the sharp decline in 1987, that led to the current circuit breaker system, were not repeated last October. We have had a degree of technological improvement that has dramatically enhanced the ability of the exchanges to keep pace with the transaction volume. That is to say, that the technological limitations of our markets are certainly a smaller problem than they were when the circuit breakers were first established.
Obviously, a decline in the market of 500 points today is a far smaller matter when the Dow Jones Industrial Average is over 8,000 than it was when the Dow was at 2,000 points.
I would also like to solicit views from both our panels on this issue of program trading "collars." First of all, the level at which they kick in now is unrealistically low. They were triggered more than 300 times last year, and have been triggered almost every day this year. Program trading is an effort by people to organize their transactions using trigger points and the power of record-keeping and formula-based decision-making with the aid of computers. In the process, the linkage between the cash and futures markets is reinforced. I think that we are making markets far less efficient by limiting the ability of people to program trade. I personally am not sure we need collars at all, but I am virtually positive that we do not need them at 50 points. That is something on which I would solicit your opinion.
Finally, before I turn the microphone over to my colleagues, let me emphasize that this is an oversight hearing. We do not contemplate trying to legislate on this matter. We are closely monitoring the process. Under that process, the markets will make a recommendation. That recommendation will then go to the Securities and Exchange Commission and will be submitted for public comment before there is a final decision.
Following the market decline of last October, Senator Dodd and I sent a letter to the institutions that are represented here on the first panel, the leading members of the Interagency Working Group on Financial Markets, requesting that they conduct a review of the operations of the circuit breakers. We have also consulted with the institutions represented on the second panel. I think it is our conclusion that the circuit breakers did not serve the cause of stability in the most recent market rundown.
Again, our objective here is oversight, to try to bring out the facts and to get an opportunity as the
subcommittee with oversight responsibility for America's security markets not only to gain
information, but to share our views.
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