'Circuit Breakers' and the Mission of Stock Market Stability

Chapman University School of Law NeXus Journal of Law & Policy, Vol. 15, No. 43, Winter 2010

Hofstra Univ. Legal Studies Research Paper No. 10-42

13 Pages Posted: 5 Dec 2010

See all articles by J. Scott Colesanti

J. Scott Colesanti

Hofstra University - Maurice A. Deane School of Law

Date Written: December 2, 2010

Abstract

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.

Keywords: stock exchange, circuit breaker, volatility, markets, Dow Jones Industrial Average

JEL Classification: G24, G28, H53, H22, K22, K23, P11

Suggested Citation

Colesanti, J. Scott, 'Circuit Breakers' and the Mission of Stock Market Stability (December 2, 2010). Chapman University School of Law NeXus Journal of Law & Policy, Vol. 15, No. 43, Winter 2010; Hofstra Univ. Legal Studies Research Paper No. 10-42. Available at SSRN: https://ssrn.com/abstract=1719052

J. Scott Colesanti (Contact Author)

Hofstra University - Maurice A. Deane School of Law ( email )

121 Hofstra University
Hempstead, NY 11549
United States
5164636413 (Phone)

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