Once upon a time, on a trading floor not so long ago… The NYSE Euronext, Inc.(NYSE:NYX) used to implement Trading Curbs that were different than the current Circuit Breakers.  This was just when it was the goold old NYSE.  These trading curbs implemented the uptick rule and downtick rule.  They affected program trading and were, as they sound, curbs. These weren’t market fixes in times or turmoil but did theoretically keep the swings in check.  In the days of "bringing on the free-for-all" these were done away with as being ineffective and unnecessary.  There are circuit breakers which can kick into effect, but it now takes a 1,200 point move in the DJIA to kick in. It also results in trading halts rather than just curbs.

Everyone has their own opinion on what the real impact was, and Idefinitely have my own opinion on it.  What it really did was enforcingprogram trading and "curbed" free fall trading days.  Itdepended upon the level of the DJIA as to if the curbs kicked in as 350point moves or 200 point moves.  Traders hated the curbs on the dayswhen the markets wanted to rise and rise.  But investors loved thecurbs on days where the markets would have slid down and down in anunchecked manner.

Despite the SEC’s (way-late) new implementations to regulate nakedshort selling, these could be brought back. It would not be without controversy and not without criticism.  Does it take away the free markets?  It could remove theelation or death verdict of extreme markets.  But it could also helpprevent some of the crazy and zany trading we have seen of late.  Some will hate the notion of this. In a newde-leveraging financial system from Joe Public to Richie Rich to theBillionaires, this might not be necessary after the dust settles.  But a nearly immediate reinstatement could be another mechanism for stability.  There could actually be a downside to this. It might also prevent a 1,000 point rally from ever happening in a day.

You can look here at the actual NYSE CIRCUIT BREAKERS. The first halt revolves around a 1,200 point drop in the market and thesecond revolves around a 2,400 point drop.  How long those halts laststart at 30 minutes and can ultimately end up being as much as twohours.  They can also result in the market closing for the day,although it would take a mega-event to trigger that.

This won’t stop what has happened, but it could make a little more order.  But the swings are getting to thepoint and the losses are becoming systematic enough that more and morecurbs and practices need to be implemented.  We would never argue foranything as harsh as the abolition of short selling entirely.  TheBrits just did that in the financial sector.  That truly does disruptmarkets and would make the ability of using stock options extremely difficult at best.  But there are limits to how much should be allowed.  Fundshave to essentially get permission to take their holdings above 10% ofany stock and they have to report their holdings quarterly.  One moremove won’t kill anyone.

Jon C. Ogg
September 18, 2008

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