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Rule Changes in Securities Markets in Crisis Conditions

As a day trader you will find that most trading days are governed by a predictable set of rules and regulations. Regulators sit on the sidelines, watching the markets with little interaction until a big crisis hits. When that happens, they rush in to calm the markets, often by setting up new and temporary rules until everyone is calm and normal market activities can resume.

Three main types of rules apply only in a crisis. These are circuit breakers, short-selling restrictions, and broken trades.

Circuit breakers are temporary halts on trading that apply when the market has excessive volatility, at least in the eye of the New York Stock Exchange. (Traders love volatility, but the NYSE isn't so keen.) Here's how circuit breakers work:

  • If the Dow Jones Industrial Average falls by 10 percent before 2 p.m. New York time, trading stops for one hour. If it falls that much between 2 p.m. and 2:30 p.m., trading stops for a half-hour. If it falls that much after 2:30 p.m., trading continues until the bell rings at 4 p.m. or until it hits the 20-percent mark, at which point it’s done for the day.

  • If the Dow Jones Industrial Average falls by 20 percent before 1 p.m. New York time, trading stops for two hours. If it falls that much between 1 p.m. and 2 p.m., trading stops for one hour. If it falls that much after 2 p.m., trading closes for the day.

  • If the Dow Jones Industrial Average falls by 30 percent, trading ends for the day, although it most likely would have been shut down already due to the 20-percent rule.

The other exchanges don’t have to follow the New York Stock Exchange rules, but they often do. In addition, the NYSE has the right to halt trading in any one security if it falls by more than 10 percent in a five-minute period.

Short-selling restrictions can be put into place if the regulatory authorities believe that action in one industry is dragging down the entire market. In the fall of 2008, short-selling was temporarily banned on financial services stocks.

Finally, if the market really goes haywire, the exchanges have the right to break trades. When the Flash Crash of 2010 hit, many traders were thrilled to find that they could buy shares in illustrious and profitable corporations for a fraction of their usual share price. They weren't so thrilled when the exchanges cancelled those trades.

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