What’s Behind Trading Halts and Circuit Breakers?
If the Dow Jones Industrial Average falls 10%, trading is halted on the New York Stock Exchange for 60 minutes. If the Dow Jones rallies 10%, there is no restriction. Why? Because program buying and the accompany rally is always perceived as “good”.
If the Dow Jones Industrial Average falls 20%, trading is halted on the New York Stock Exchange for two hours. There is no trading halt if it rallies 20%, as that would be perceived as “very very good”.
If the Dow Jones Industrial Average falls 30%, trading is halted on the New York Stock Exchange for the day. There is no trading halt if it rallies 30%, as that would be perceived as “the best thing that ever happened in the history of the world”.
In addition to the trading halts, we are now introduced to the Fed and the Treasury’s attempts at recession halts. Parallels exist for a reason and history is suggesting a similiar repeat to the 1930’s. After the crash of 1929 and the subsequent market bottom made in 1932, the US government got down to business and created the SEC 1933 and 1934 Act. The 33 act was a requirement to register securities with a prospectus prior to Initial Public Offering. This was to ensure that the public would have all the information available on a security before they make an investment. The 34 act required brokerage firms to license their brokers with the SEC.
Now, flash forward to the close of the first quarter 3/31/2008. The total notional dollar amount of derivatives held by us commercial banks equaled $180.34 trillion (*1). This is an unregulated market!
Since the close of the last bear market in 2003 the amount has tripled in five years. The top seven commercial banks account for 96% of the total notional amount of derivatives in the commercial banking system. Since then Wahsington Mutual and Wachovia were absorbed. This is the reason for the Fed to say “too big to fail”.
*1Source: Comptroller of the Currency, Ned Davis Research
