NYSE Collar (Rule 80A): Index arbitrage tick test Rule 80A provides that index arbitrage orders can only be executed on plus or minus ticks depending on which way the DJIA is. In the parlance of the NYSE, the orders must be "stabilizing." This rule only effects S&P 500 stocks, and is also known as the "uptick downtick rule" because it restricts sells to upticks and buys to downticks. In other words, when the market is down (last tick was down), sell orders can't be executed at lower prices. In an up market (last tick was up), buy orders can't be executed for higher prices. This collar is removed when the DJIA retraces its gain or loss to within approximately 1% of the previous close. As of 3Q02, the collar is imposed at 180 points and removed when the DJIA retraces its position to within 90 points of the previous day's close.
CME Restrictions Trading in the S&P500 futures contract is halted just for a few minutes if the prices moves 2.5%, 5%, or 10% from the previous close. Because restrictions on the NYSE effectively shut down trading in this futures contract, there is little need for additional restrictions on the CME.
NYSE Circuit Breakers These restrictions are also known as "Rule 80B." The first version of this rule, adopted in 1988, set triggers at 250 DJIA points and 400 DJIA points. These restrictions are updated quarterly to reflect the heights to which the Dow Jones Industrial Average has climbed.
10% decline (950 points for 3Q02) The first circuit breaker is triggered if the DJIA declines by approximately 10%. The restrictions that are put into place -- if any -- depend on the time of day when the circuit breaker is triggered. If the trigger occurs before 2pm Eastern time, trading is halted for 1 hour. If the trigger occurs between 2 and 2:30pm Eastern, trading is halted for 30 minutes. If the trigger occurs after 2:30pm Eastern time, no restrictions are put into place. (This restriction was first used during the afternoon of 27 Oct 97.) Note that there is no similar restriction to the upside; nothing is done if the Dow rallies 10%.
20% decline (1900 DJIA points for 3Q02) The second circuit breaker is triggered if the DJIA declines by approximately 20%. The restrictions that are put into place again depend on the time of day when the circuit breaker is triggered. If the trigger occurs before 1pm Eastern time, trading is halted for 2 hours. If the trigger occurs between 1 and 2pm Eastern, trading is halted for 1 hour. If the trigger occurs after 2pm Eastern time, the NYSE ends trading for the day. Again there is no similar restriction to the upside; nothing is done if the Dow rallies 20%.
30% decline (2850 DJIA points for 3Q02) The third circuit breaker is triggered if the DJIA declines by approximately 30%. The restriction is very simple: the NYSE closes early that day. And like the other cases, again no restrictions are imposed if the Dow rallies 30%. The circuit breakers cut off the automated program trading initiated by the big brokerage houses. The big boys have their computers directly connected to the trading floor on the stock exchanges, and hence can program their computers to place direct huge buy/sell orders that are executed in a blink. This automated connection allows them to short-cut the individual investors who must go thru the brokers and the specialists on the stock exchange.
Statistical evidence suggests that about 2/3 of the Mar-Apr 1994 down slide was caused by the program traders trying to lock in their profits before all hell broke loose. The volume of their trades and their very action may have accelerated the slide. The new game in town is how to outfox the circuit breakers and buy or sell quickly before the 50-point move triggers the halting of the automated trading and shuts off the computer.
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