While reading an article “Stocks: Time to Slow Things Down?” it occurred to me that I haven’t seen “curbs in” on CNBC in a long time. After a quick search I discovered that the NYSE scrapped curbs back in November 2007 (emphasis is mine):
The NYSE formerly implemented a curb on program trading whenever the NYSE Composite Index moved 190 points or more from its previous close, and remained in place for the rest of the trading day or until the gain or loss had decreased to 90 or fewer points. This curb permitted program sales to be executed only on upticks and program buys on downticks. A program trade is defined by the NYSE as a basket of stocks from the S&P 500 where there are at least 15 stocks or where the value of the basket is at least $1 million. Such trades are generally computer automated. Since over 50% of all trades on the NYSE are program trades, this curb limited volatility by mitigating the ability of automated trades to drive stock prices down via positive feedback.
This curb was fairly common, and financial television networks such as CNBC often referred to it with the term “curbs in.”
On November 7, 2007, the NYSE confirmed that the exchange has scrapped this rule as of November 2. The reason given for the rule’s elimination was its ineffectiveness in curbing market volatility.
That ‘Slow Things Down’ article talks about possibly reinstating the uptick rule and other measures to stop cascading moves. People love to point to the removal of the uptick rule as a major contributing factor in the current slide but I hadn’t heard anybody mention the lack of program trading curbs. I’d sure like to know how the NYSE came to the conclusion that the curbs were ineffective. It seems to me that the removal of the curbs combined with the removal of the uptick rule was a deadly combination.
Jon C. Ogg wrote an article about reinstating program trading curbs last month. Here are a few key points he made (emphasis is mine):
These trading curbs implemented the uptick rule and downtick rule. They affected program trading and were, as they sound, curbs. These weren’t market fixes in times or turmoil but did theoretically keep the swings in check. In the days of “bringing on the free-for-all” these were done away with as being ineffective and unnecessary…
What it really did was enforcing program trading and “curbed” free fall trading days… Traders hated the curbs on the days when the markets wanted to rise and rise. But investors loved the curbs on days where the markets would have slid down and down in an unchecked manner…
It could remove the elation or death verdict of extreme markets. But it could also help prevent some of the crazy and zany trading we have seen of late. Some will hate the notion of this… But a nearly immediate reinstatement could be another mechanism for stability. There could actually be a downside to this. It might also prevent a 1,000 point rally from ever happening in a day.
I sure hope that bringing the curbs back is being discussed along with the more extreme measures that are currently under discussion. Bringing that rule back seems like it couldn’t hurt much and could possibly help a great deal.
That’s odd. I had not even thought about curbs until your post, but now that I am I can’t believe that doing away with them was not more publicized…and I can’t believe I haven’t thought “why haven’t the curbs kicked in” over the past few weeks.
We all were lulled to sleep!
Interesting, but don’t you guys love this volitlity? This is what we trader love… especially for day trade! we day trader thrive on volitility! I love this market! I hope we get this big move all the time, making mucho money!
From the article:
>>Market experts consider such steps as banning short-sellers…
That would suck. I sure hope they don’t follow through with banning all short sales. It’s not the problem.
I’m fine either way with the uptick rule. It never bothered me to begin with. Curbs are fine as well.
@blues
Live it up while you can, blues. Individual and small traders are going to be put out of business after all this is said and done. The markets as we know them now are going to change or die out completely. There will be only crumbs for small traders. Not enough to get by.
Make your profits now and get ready to fill out that application to Taco Bell.
What the heck’s wrong with letting people trade? Why is one person’s trade legit and another one’s isn’t? Because you don’t want the stock or the market to move? COME ON!
Several weeks ago we spoke about Buffett buying GS and GE…many thought that he might be following in the footsteps of Ben Graham…In reality…even though the stock market has been pounded this week… it is NOT CHEAP…Cheap is like in the late 1970s or early 1980s…single digit PEs…selling below book value… Dividend yields mid single digits…
What do you think? Cheap can get cheaper…as well I could be totally wrong and we are in the biggest rally this year.. what do you think..? Is pray and pay enough? I am a member of Myinvestorsplace.com and we are searching for answers. Any suggestions?
I agree. This is one of the few proposals that actually has little to no risk of bad unintended consequences. Sure the market may still want to go from point A to B, but at least we have some protection from machines that go completely out of control. Give the eggheads time to shut the damn things off! lol…
I also tend to agree that in time, we’ll see some form of new “rules” implemented that will severely hinder the retail intraday-trader (us). The writing is on the wall. First thing that is probably going to go is the 4×1 margin. I personally never use it although most do. Also, the amount of leverage the hedge funds have enjoyed the past decade or so is also drying up, not to mention the demise of risky trading desks at the now extinct investment banks. I could go on and on but once the selling party is over and the market regains some form of stability, throw all your daytrading rules in the can as we’re about to enter a long-term era of drifting markets with no explosive trends.