The market’s down 400 points today, continuing this terrorific scream-ride we’ve been on. EVERYBODY PANIC. Right? Actually, here’s how — and when — the NYSE prevents one-stop-drop financial Armaggedon.
Since 1988, inspired by the previous year’s calamitous Black Monday dive — the NYSE has had circuit breakers in place to forestall any nosedives that would cause a systemic collapse. While you might think 400 points sounds dramatic — and it certainly is a healthy chunk — it’s not nearly enough to slow trading down, much less stop it altogether.
As this chart from NYSE-Euronext shows, the circuit breakers come into play only when the market loses a certain percentage, and even then only at a certain time of day. A 10 per cent drop (1200 points, three times what we’re looking at as of this post) before 2pm will cause a one-hour halt in trading, but after 2:30 it’s business as usual. Likewise a 20 per cent drop will cause a two-hour pause before 1pm, and will shutter the market for the day if it happens after 2pm. In fact, for the market to shut down entirely regardless of time, it would have to drop 30 per cent — around 3600 points.
As you can imagine, the system doesn’t kick in very often; two trigger points were hit on October 27, 1997, when the market was first halted for 30 minutes, then closed for the day, but that’s pretty much it. A more common occurrence is when the circuit breakers cut off trading on individual stocks that rise or fall more than 10 per cent in five minutes.
So! Feel comforted in the knowledge that if things do head straight to hell, there are at least a couple of speed bumps. And be terrified knowing that we’ve got so much further to drop before we hit the first one. [NYX]