Are stock-exchange circuit breakers doing their jobs?

Traders frustrated as mechanism meant to calm markets failed to prevent coronavirus-fuelled plunges

Are stock-exchange circuit breakers doing their jobs?

The S&P 500 twice saw sharp 7.5% drops in the opening minutes of trading last week, first on Monday and again on Thursday, triggering circuit breakers meant to give traders a respite and head off deeper declines. But as the S&P 500 closed 7.6% down on Monday and 9.5% lower on Thursday, some traders are questioning the effectiveness of the moves.

“I think they’re more disruptive than helpful,” Dennis Dick, a trader a Bright Trading LLC, told the Wall Street Journal.

Citing figures from Rosenblatt Securities, the Journal said U.S. stock markets registered trading volumes just shy of 19 billion shares on Thursday; on February 28, it reached 19.4 billion, its second-highest level ever. Alongside Thursday’s trading activity came 781 single-stock halts, more than the combined tally for January and February, reported financial-date vendor MayStreet. 

The circuit breakers that had been tripped at 9:34 AM ET on Monday and 9:35 AM on Thursday reportedly did not shock traders, as stock futures had declined by 5% — the most they’re allowed to fall — in the hours preceding the opening bell. Circuit breakers were once again tripped yesterday following an 11% plunge in the S&P 500 as of 9:51 AM in New York.

Mehmet Kinak, global head of systematic trading at T. Rowe Price Group, questioned the wisdom of early marketwide halts to trading, asserting that the middle of the trading day would be a better window. Georgetown University finance professor James Angel, whose field of study includes circuit breakers, called a halt immediately after the market opens “just dumb.”

In their current form, which is based on rules instituted following the May 2010 flash crash, the three levels of circuit breakers to U.S. trading are linked to 7%, 13%, and 20% declines in the S&P 500.

Detractors in the academe say because investors can see when a market is approaching a halt, they are more prone to sell in a panic in the final moments before the level is breached, thus creating worse selloffs.

But others aren’t so critical of the marketwide circuit breakers. “I would say they accomplished what they intended to accomplish,” said Jack Miller, head of trading at Milwaukee-based Robert W. Baird & Co., relating how the “eerie silence” provided a window for traders to stand up and stretch.

The notion was seconded by Phil Mackintosh, chief economist at Nasdaq Inc., who noted that the 15-minute halts were followed by a smooth reopening of the markets.


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