The New York Stock Exchange's circuit breaker rule, Rule 80B, was triggered on October 27, 1997, when trading was halted for the first time since the rule was adopted in 1988. Coordinated cross-market trading halts, including Rule 80B, were adopted by the Exchange, other securities markets, and futures markets trading stock index futures contracts following recommendations of the Working Group on Financial Markets contained in studies of the market break of October 19, 1987. As currently constituted, Rule 80B provides for a one-half-hour trading halt if the Dow Jones Industrial Average drops 350 points and a one-hour trading halt if it drops 550 points on the same day.
The Exchange views circuit breakers as an important tool for bolstering investor confidence in times of extreme market volatility. They provide time to reestablish equilibrium between selling and buying interest and provide all investors with the same opportunity to become aware of and respond to significant price movements. The Exchange is currently reviewing the threshold levels for trading halts, but we believe the reasoning that led to their adoption applies with even greater force today.
The experience on October 27, 1997, when the Dow dropped 554 points in one day, reinforces our view that circuit breakers provide important investor protections in times of severe market stress. On that date, trading was halted for one-half hour at 2:36 p.m. with a drop of 350 points. Trading resumed at 3:06 p.m., and the second trading halt was invoked at 3:30 p.m., closing the markets for the day.
While there was general agreement that market mechanics performed very well on October 27, the unprecedented triggering of trading halts led to a renewed policy debate about the role of circuit breakers. The NYSE, the SEC, and the Working Group undertook reviews. The NYSE's Board debated possible changes in December, and there appears to be consensus for raising the threshold levels to points equivalent to 10% and 20% of the Dow -- roughly 800 and 1600 points at today's market levels. Procedures for closing when trading halts are triggered late in the day remain an outstanding issue. Final action is expected at the Board's meeting on February 5.
NYSE Rule 80A provides restrictions on index arbitrage when the Dow moves up or
down 50 points from the previous day's closing level. Questions have been raised
about whether the 50-point threshold is appropriate at today's market levels. This
matter is currently under discussion, and specific proposals to change Rule 80A are
expected to be developed after changes to Rule 80B are approved.
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