NeXus Journal of Public Policy
Between the morning of October 19, 1987 and the closing bell of October 20, 1987, the Dow Jones Industrial Average fell 25%. Shunning the drastic remedy of closing the markets (akin to FDR’s “bank holiday” of March 1933), the regulatory response ultimately took the form of ‘circuit breakers,’ crudely fashioned, limited trading halts that some critics described as “throwing sand in the gears.”
The calibration of the decline prompting a trading halt remained constant from the time of the implementation of the circuit breaker in April 1989 until April 1998. At that time, the trigger point was changed from an absolute number to a percentage of the average closing values of the prior month. That percentage calculation was not altered until December 31, 2008. Consequentially, between October 2007 and February 2009 – as an inflated DJIA gradually declined over 40% - the breakers were not triggered once, raising questions concerning their purpose and effect.
The Paper thus examines the efficaciousness of artificial obstacles to panic selling, in general, and of efforts to arrest intra-day market freefalls like NYSE Rule 80B, in particular.
Ultimately, the Paper seeks an answer to the question of why stock exchanges like the NYSE have acted as steadfast spectators to a disastrous downturn that the public has been reminded of on a daily basis.
J. Scott Colesanti,
Circuit Breakers and the Mission of Stock Market Stability, 15 NeXus J. 43
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