As defined by the New York Stock Exchange, program trading involves the purchase or sale of a basket including 15 or more stocks with a total market value of $1 million or more. Most program trades are executed on the New York Stock Exchange, using computerized trading systems. Index arbitrage is the most prominently reported type of program trading. In a effort to try and monitor program trading, the NYSE keeps daily statistics of trading volume and how much of it is a result of program trading.
In an effort to keep the computers from running amok and launching an avalanche of sell orders on the unsuspecting traders that would decimate the market, certain things known as “circuit breakers” would kick in should the following circumstances occur.
If, in a single day of trading, the Dow Jones Industrial Average were to fall by 10%, the circuit breakers would kick in and trading on the floor of the Exchange is halted for one hour. I guess this is meant so that people can catch their collective breaths and calm themselves before the panic starts in. Naturally, if the Dow rises by more than 10%, no trading is halted since people are making money hand over fist and everybody goes home happy.
If the Dow were to fall 20% in a single day, trading would be halted on the floor for two hours. This is allow people time to make it up to the rooftops, say their prayers and jump into the arms of their maker. Again, should the Dow rise 20% or more, no trading is halted. You can plan your next vacation on your own time.
If the Dow was having a really bad day and dropped more than 30%, trading is halted for the day. This is to allow those contemplating suicide to wrap up any loose ends and get it done right. Once again, if it were to rise 30%, the game is still on and your retirement plans are still in intact if not flourishing. Buy that beachfront property, get yourself the new Porsche for this would considered by many to be the best thing that ever happened.
Naturally, all of these safeguards are in place for people and institutions that can afford to invest in the market in the first place. For the average schmuck who’s trying to eke out a living and lives paycheck to paycheck, they are probably meaningless.
Note: The circuit breakers responsible for halting trading we’re called into use for the first time on October 29, 1997. They were used twice during the day in order to try and stem the selling generated by program trading. The Dow wound up losing 554 points that day or about 7.2 percent of the total market value.