"CIRCUIT BREAKERS"......They Should Rename It To "MARKET BREAKERS"!greenspun.com : LUSENET : TB2K spinoff uncensored : One Thread
This is from Cycle Pro
"Circuit Breakers"... they should rename it to "Market Breakers"!
Circuit Breakers and Trading Halts: The following is the standard U.S. stock market circuit breaker sequence for single-day declines of 10%, 20%, or 30% that is currently implemented:
A 10 percent decline will halt trading for one hour if triggered before 2:00 p.m. Eastern time. At or after 2:00 p.m. but before 2:30 p.m., trading will stop for 30 minutes. At or after 2:30, the market will not stop for a 10% drop.
Trading will stop for two hours when a 20% decline occurs before 1:00 p.m. Between 1:00 and 1:59 p.m., the halt will be for one hour. If the DJIA drops 20% at or after 2:00 p.m., trading will stop for the day.
A 30% drop will halt trading for the day, regardless of when it occurs.
The index point value that triggers a circuit breaker to kick in is determined at the beginning of each calendar quarter. The closing DJIA on 12/31/99 was 11497.10 -- therefore, a 10% decline will be trigged when the DJIA drops -1150 points, 20% is -2300 pts, and 30% is -3450 pts. After April 1, 2000, new point values will be calculated from the closing DJIA price on March 31, 2000.
Click here for trading limits for CME Equity Futures.
A very significant piece of information to remember is this: the circuit breaker trigger levels are only monitored for the Dow Jones Industrial Average (DJIA). Why is this so significant you ask? Plenty...
First of all, once the DJIA circuit breaker is triggered then all U.S. markets will be simultaneously shut down (including NYSE, Nasdaq, AMEX, Pacific, Philadelphia, Equity Futures, and Options on stocks, cash indexes, and equity futures). (I am not sure about Instinet and other off-hours electronic trading arenas).
Second, the Nasdaq indexes have been rising almost exponential compared to the feeble DJIA which is currently about where it was in March, 1999. The Nasdaq COMP, on the other hand, is 100% higher than March, 1999. The past few days are a nibble of what to expect when the crash finally comes -- the DJIA today fell 1.4% while the COMP fell 4% -- the ratio for a crash-like selloff will be an even greater divergence. But for relative percentage comparison purposes, the COMP fell about three times further than the DJIA today.
What do you think will happen to the COMP if the DJIA falls -1000 points in a single day? It is not enough to trigger the circuit breaker even though it would be a -10% drop from current levels. Using the ratio from today's close at DJIA 9811 (ie: DJIA -1.4%, COMP -4%), if the DJIA dropped just shy of enough points to trigger a market shutdown, the COMP could be down... (drum roll please)... a whopping -28%, all in one day and the market would not even be shut down!
How's that for market volatility?
Third: And that's not even the whole story... this is a perfect setup for a group of market manipulators that want to capitalize on this planning oversight. A spread trade between DJIA and Nasdaq 100 futures and cash stocks could be done (by some very well-financed traders) that would effectively buy/support the DJIA index (only about 20 of the 30 stocks effectively controls the whole index) and aggressively sell the Nasdaq 100 (only 15-20 of the leader stocks control the whole index). The DJIA could be allowed to drop perhaps -8% and then initiate the spread trade: buy DJIA stocks and futures, simultaneously sell Nasdaq 100 stocks and futures. A large-enough spread trade would significantly magnify the Nasdaq losses. They'll have to be a little careful since Microsoft and Intel are part of both indexes... but now that I think of it, this makes it even better since a hard sell of MSFT and INTC may be all it takes to hold the DJIA down to -8% while the rest of the stocks are supported. It's so easy, I am sure some of the biggies are going to consider attempting it.
Where will the Crash Protection Team (CPT) be in all of this... buying S&P futures, of course. This will aid the DJIA much more than it will the Nasdaq COMP. The CPT may have trouble using Nasdaq 100 futures since it is not adequately liquid enough for the CPT floor traders to worm their way in and out of their positions. Therefore, this leaves the Nasdaq indexes (COMP and Nasdaq 100) exposed and vulnerable to massive manipulation.
Fourth: Don't think that stop-loss orders are going to completely protect the investors highly leveraged, margined high-tech stock holdings... once a stop-loss is triggered, it becomes a Market Order! During a very fast sell-off, the "market" can drop whole percentage points in one fell swoop. Nonsense? Look what happened at the open of trading in the COMP today. From the COMP close yesterday at 5050, the very first COMP tick this morning was at 4879, a drop of -171 points (-3.3%) that gobbled up all intervening stops in the process.
Fifth: No matter how much the Nasdaq loses in this one day... all brokers will be calling on clients to force them out of their (losing) margined high-tech stock holdings. The next day will likely be another massive sell-off because of all of this forced selling. Some e-trading accounts actually allow the brokerages to automatically liquidate in certain circumstances -- did you read the fine print? These "Market-On-Open" trades may take the markets down enough to challenge yet another trigger level.
Whew... that's quite a wild trading story... or is it?
-- Zdude (email@example.com), March 16, 2000
Zdude -- interesting thesis -- I'm printing it out for study.
-- A (A@AisA.com), March 16, 2000.
These "Market-On-Open" trades may take the markets down enough to challenge yet another trigger level.
Yes, interesting hypothesis. Thanks for posting this ... I've been having similar thoughts, but since I'm still a newie in this area, I haven't wanted to venture too much beyond asking questions in public.
-- (firstname.lastname@example.org), March 16, 2000.