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Let’s Not Fall Into The Gap: Balance and Harmony Pay Well Indeed
Since the 1987 22% one day crash, circuit breaker trading halt levels for the INDU were set at 10%, 20% and 30%. The Dow point equivalents are recalculated every quarter. Circuit breaker levels for the 4th quarter 2009 are as follows:
Level 1 Halt
Requires a 950-point drop in the Dow before 2 p.m. and halts trading for one hour; for 30 minutes if between 2 p.m. and 2:30 p.m.; and no halt at 2:30 pm or later unless there is a level 2 halt.
Level 2 Halt
A 1,950-point drop in the Dow before 1:00 pm halts trading for two hours; for one hour between 1:00 pm and 2:00 pm; for the remainder of the day at 2:00 p.m. or later.
Level 3 Halt
A 2,900-point drop in the Dow halts trading for the remainder of the day regardless of when the decline occurs. These halt levels are based on an averaged DJIA index of 9500 for the 3rd quarter.
To put these halts in perspective, let’s compare them to the daily percentage drops of past crashes. Below are the top ten largest percentage declines for the DJIA on a daily basis:
http://www.midasletter.com/print/printpage.php
We note two of the 10 largest percentage drops in the Dow came in 1987, a week apart, likely due to margin calls, while the 9th largest drop came last year. Now settlement is three business days, so margin calls and echo declines could come faster.
