Sunday, January 2, 2011

Trading Curbs

Given the extreme complacency and overbullishness of the market, I think it's time to review the trading curbs that are currently in effect in the event of a crash.

At the start of each quarter, the NYSE sets three circuit breakers at levels of 10%, 20%, and 30% of the average closing price of the Dow Jones Industrial Average for the month preceding the start of the quarter, rounded to the nearest 50-point interval. This page has the current circuit breaker levels.

The circuit breaker rules call for a trading halt or for the market to close, depending on the size of the drop and the time of day.

There are also single stock circuit breakers now, an invention adopted after the 2010 "flash crash", so we have no experience with the unexpected ways they will screw up the market.

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