This makes a little bit more sense
NYSE curbs fail to arrest Dow's tumble
By Anuj Gangahar and John Authers in New York
Financial Times
Updated: 11:12 p.m. ET Feb 27, 2007
The Dow Jones Industrial Average on Tuesday suffered its steepest one-day decline in more than five years as hedge funds and other traders of large blocks of shares struggled to cope with curbs put in place by the New York Stock Exchange. Those curbs were designed to encourage orderly trading.
Such so-called "circuit breakers" have been used by the US stock exchange during previous sharp market declines.
These can potentially bring trading to a halt. But because the worst of the plunge on Tuesday took place after 2.30 pm, the NYSE did not halt trading. Instead, at 1.03pm the NYSE introduced what it calls a trading collar. Such measures are introduced in the event of a 180-point decline in the NYSE composite index, and ensure that all large block orders of the S&P 500 stocks must be "stabilising" for the remainder of the day – meaning that they can take place only after an "up-tick" in the stock. It will be removed at the start of trading today, but it remained in place until the close of trading on Tuesday.
Trading collars can be removed if the index moves back to within 90 points of the previous day's close, but that did not happen yesterday.
"Normally, when circuit breakers kick in to stop us from selling, we get a bounce," one trader said. "However, a whole queue of sell orders hit the system. That is not a good omen when the circuit breakers do not bring us back. We dropped in a matter of minutes. This is not supposed to happen."
William Strazzullo, chief market strategist at Bell Curve Trading, said the profusion of hedge funds and highly leveraged trading strategies was a likely reason behind the Dow's sudden decline. "The margins for error are tiny; once the market turns, they have to get out fast. This is a move that five years ago would have taken a week, but now there is just so much hot money out there chasing the market."
It is not the first time that circuit breakers have been blamed for a sharp market drop. Tuesday's trading had many similarities with Monday October 27 1997, when the Dow fell more than 7 per cent in the wake of a 6 per cent sell-off in Hong Kong overnight.
Then, the circuit breakers brought trading to an automatic 30-minute halt once the Dow Jones Industrial Average had fallen 350 points. This landmark was reached at 2.35pm. Once the market reopened, it took only 25 mintues for the Dow to fall another 200 points. At that point, the circuit breakers called for the New York Stock Exchange to bring trading to a halt, half an hour early.
The rules had been introduced in response to the "Black Monday" crash of October 1987.
© The Financial Times Ltd 2007. "FT" and "Financial Times" are trademarks of the Financial Times.Copyright The Financial Times Ltd. All rights reserved.
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