Program Trading Curbs
Whenever CNBC runs a banner on your television screen that says CURBS IN or CURBS IN, we receive a ton of email from investors asking "What are curbs?" Here is the answer for you:
Program Trading "Collars"
A collar on program trading firms instituted by the NYSE is most commonly referred to on CNBC as "curbs in". The NYSE applies program trading curbs whenever the Dow Jones Industrial Average moves 180 points higher, or 180 points lower than the previous day's closing price.
This NYSE restriction on program trades stays in place until the Dow Jones returns to within 90 points of the previous day's closing price; or, until the end of the trading day at 3:00 CT. The restrictions will be re-imposed each time the Dow Jones advances or declines 170 points. NYSE Trading Curbs apply only to our firm's (and other program trading firm's) computer assisted program trades. Contrary to what the public thinks, these collars do not completely stop all program trading, nor do they cancel out today's premium (prem) execution levels.
The NYSE defines a Program Trade as:
1. A basket of 15 or more stocks from the Standard & Poor’s 500 Index.
2. A basket of stocks from the Standard & Poor's 500 Index valued at $1 million or more.
Once the NYSE program trading collar is in place, Program Selling can be executed only on an up-tick. That means that the last trade was executed at a higher price than the trade before it. Program Buying can be executed only on a down-tick. That means that the last trade was executed at a lower price than the trade before it.
Program Trading "Sidecars"
In the past, this was another type of NYSE Trading Curb. It was eliminated on Tuesday, February 16, 1999.
Program Trading "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".
According to the NYSE the current 10, 20 and 30 percent decline levels, respectively, in the DJIA will be as follows: A 900 point drop in the DJIA will halt trading for one hour if the decline occurs before 2 p.m.; for 30 minutes if before 2:30 p.m.; and have no effect between 2:30 p.m. and 4 p.m. A 1,800 point drop will halt trading for two hours if the decline occurs before 1 p.m.; for one hour if before 2 p.m.; and for the remainder of the day if between 2 p.m. and 4 p.m. A 2,750 point drop will halt trading for the remainder of the day regardless of when the decline occurs. Point levels are set quarterly by using the DJIA average closing values of the previous month, rounded to the nearest 50 points. The percentage levels are adjusted quarterly on Jan. 1, April 1, July 1 and Oct. 1.
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