Senate Banking, Housing and Urban Affairs Committee

Subcommittee on Securities


Prepared Testimony of the Honorable Arthur Levitt, Jr.
Chairman
Securities and Exchange Commission


Oversight Hearing on Market Circuit Breakers

2:00 p.m., Thursday, January 29, 1998

Circuit breakers are coordinated, cross-market trading halts. They are one of several measures designed to protect our nation's capital markets and investors in those markets in the event of a severe decline.

Under current circuit breaker rules, trading is halted for 30 minutes when the Dow Jones Industrial Average drops 350 points and for 1 hour when it drops 550 points from the previous day's close. The circuit breakers have been triggered once -- on October 27, 1997. There is general consensus that the 7 percent decline of October 27 was not the type of extraordinary decline that circuit breakers were meant to address.

-- Circuit breakers should be triggered only in extraordinary circumstances. Circuit breakers were meant to be triggered only in truly extraordinary circumstances -- i.e., a severe market decline when the prices drop so dramatically that liquidity and credit dry up, and when prices threaten to cascade in a panic-driven spiral.

-- The current circuit breaker trigger points should be raised. There is general consensus that the current levels for circuit breakers should be raised. The Commission is very interested in the proposals to change the limits from a point based to a percentage based drop in the Dow Jones Industrial Average. The exchanges currently are discussing whether to raise circuit breaker triggers to 10 percent for the first halt and 20 percent for the second halt.

-- The markets should have an orderly close every day. In order to achieve an orderly daily close, some attempt should be made to reopen the markets after the triggering of a circuit breaker if it is not triggered late in the trading day. The original purpose of the circuit breakers was to provide for a brief pause in trading -- not to halt trading for the day.

-- The international financial markets look to the U.S. financial markets. The world today looks to our nation's financial markets for leadership. Closing these markets at any time risks creating an unfounded impression that the U.S. financial markets cannot function. For this reason also, it is important that circuit breakers, which are designed to provide only a "pause" in trading, be triggered only in extraordinary cases.

-- Advances in technology will require us to revisit periodically the circuit breaker rules. Technological advances enable our markets to handle record volume trading days -- a billion shares have traded hands over the New York Stock Exchange in one day without a glitch. Technological advances also assist in the wide dissemination of market information, so more investors can make informed decisions. The financial markets cannot reap the rewards of all these technological advances and be held back by static circuit breaker rules. Thus, the Commission encourages the exchanges to revisit periodically their circuit breaker rules and to make the changes necessary to keep our nation's capital markets the most efficient, most liquid, and most diverse in the world.

Any regulatory measure designed to protect markets and investors must be scrutinized to determine whether it will achieve its intended goal with minimal market disruption. The Commission believes that the current initiatives to modify the circuit breaker rules are an essential part of this process, and looks forward to working with Congress, our fellow regulators and representatives of the financial markets to produce the most effective, least intrusive, circuit breaker programs possible.




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