New procedures to lock down trading of shares that show erratic or panicked movement got their first test yesterday, when shares of the Washington Post Co. (WPO) spiked to almost $1000, reported Bloomberg on Thursday.
The trading halt appeared to vindicate those who called for new circuit-breaker rules, as WPO stock was frozen after just 766 trades at twice the market price of $462.84.
The circuit breaker system kicks in when the price of a stock rises or drops at least 10 percent in under five minutes. Some traders and analysts interviewed by Bloomberg criticized the system, saying they didn’t do enough to calm volatility and reacted too late to stem another serious problem.
The SEC approved the new “circuit breaker rules” last week, in response to the May 6 market glitch that saw the Dow drop almost 1,000 points in just minutes of panicked trading before recovering much of its losses. The plunge has been alternately blamed on computer glitches, automated trading programs misbehaving or a “fat-finger” trader entering an erroneous order.
“The May 6 market disruption illustrated a sudden, but temporary, breakdown in the market’s price setting function when a number of stocks and ETFs were executed at clearly irrational prices,” said SEC Chairman Mary Schapiro.
The increased stability offered by this system should steady the nerves of investors in stock index futures, as long as the circuit breaker can prevent another glitch like that on May 6.
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