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Stock Traders Criticize Market 'Circuit Breakers'

By Brett D. Fromson
Washington Post Staff Writer
Thursday, October 30, 1997; Page E10

During Monday's global stock market rout, some angry traders said that rules requiring Wall Street to halt trading to calm investors may have instead intensified late-day selling in New York.

They said that "circuit breakers," trading halts created after the October 1987 crash, caused traders to flee stocks rather than risk holding them when the market closed early.

The complaints from Wall Street are getting a hearing in Washington. Federal Reserve Chairman Alan Greenspan and Securities and Exchange Commission Chairman Arthur Levitt Jr. both raised questions yesterday about the mandatory timeouts and their market impact Monday.

"My own personal view has never been wholly friendly to circuit breakers or stopping markets, because I'm always concerned as to how in the world are you going to get them started again," Greenspan said during his appearance before Congress's Joint Economic Committee. "But that view is countered by many who claim that indeed there are significant benefits."

Levitt told the House banking committee that the circuit breakers functioned as intended, but he added that "there have been concerns raised in two areas: about the level at which the circuit breakers are triggered and about whether they unnecessarily disrupt trading. Those are legitimate concerns that should be addressed."

Meanwhile, Sens. Phil Gramm (R-Tex.) and Christopher J. Dodd (D-Conn.), both members of the Senate Banking Committee, have asked Treasury Secretary Robert E. Rubin to study the effectiveness of the breakers. A Treasury spokeswoman said Rubin would "be responding soon."

The cause of the fuss was the closing of the markets in New York at 3:30 p.m. after the Dow Jones industrial average had fallen 550 points Monday, or 7 percent. Circuit-breaker rules called for a 60-minute timeout, which ended the trading day because there were only 30 minutes left in the session. An earlier breaker had caused a 30-minute pause in trading after the Dow had dropped 350 points.

The final timeout "was a magnet for selling," said Harold Bradley, director of stock trading for American Century Investment Management, which guides the Twentieth Century, American Century and Benham families of mutual funds. "The selling was orderly until the first halt. After that it was a disaster, because everyone knew they had to sell before the Dow dropped down 550 and we closed for the day," Bradley said.

Former regulators speaking yesterday at a conference in Washington on the October 1987 crash also called for changes. Former Treasury undersecretary Robert Glauber, executive director of the Brady Commission that studied the 1987 crash and recommended circuit breakers, said the breakers were "too narrow" and repeated his call for them to be widened. He proposed that the triggers for the circuit breakers be revised annually using percentage declines in the Dow, not point losses.

© Copyright 1997 The Washington Post Company

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