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Circuit breakers and stock market volatility
Author(s) -
Santoni G. J.,
Liu Tung
Publication year - 1993
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.3990130304
Subject(s) - stock market , volatility (finance) , stock (firearms) , futures contract , financial economics , economics , futures market , history , context (archaeology) , archaeology
C ircuit breakers were first introduced by the New York Stock Exchange (NYSE) in 1988 in the form of NYSE Rule 80A. The rule imposed restrictions on use of the NYSE Designated Order Turnaround (DOT) System to enter orders involving index arbitrage when the DOW Jones Industrial Average (DJIA) reached a level of 50 or more points above or below its previous closing 1evel.l Rule 80A has evolved over time and other rules have been added. The rationale advanced by the NYSE in implementing the rules is “The Exchange and other market centers have been concerned that sophisticated trading strategies related to program trading may create excess volatility that undermines investor confidence in the fairness and orderliness of the securities markets, and may in fact constitute a threat to the viability of American capital markets.”2 These are strong claims suggesting that the trading strategies increase the variation in securities prices to a level that drives business e l~ewhere .~ Excess volatility, the notion underlying the rationale for circuit breakers, is a troublesome concept. It suggests there are times when herd instincts cause investors to push prices to levels (either higher or lower) that some cooler heads know are unsupportable.