Circuit breaker proposal ineffective: Birinyi

NEW YORK (BestGrowthStock) – A proposal to halt trading in S&P 500 stocks in the event of a sudden plunge similar to that seen on May 6 will not stop a market crash, according to a research note published by Birinyi Associates on Thursday.

In response to the plunge, the Securities and Exchange Commission proposed introducing stock-specific circuit breakers which would halt a stock for five minutes if it declines more than 10 percent in a five-minute period.

Birinyi analyzed the trading that took place on May 6 from 2.40 p.m. until the close and applied the 10 percent rule as if it had been in effect when major indexes fell as much as 9 percent in a matter of minutes.

Had the rule been in effect the analysts found that the Dow still would have slumped 500 points in five minutes while the adjusted low would have been 9,919.53 — just 49.91 points above its actual intraday low of 9,869.62.

In addition, Birinyi believes that the rule, which could come into effect as early as June, would have hindered the quick move back up as five of the Dow’s 30 components would have been halted for the rebound.

“We are concerned that new rules and structural changes are implemented without careful consideration of their potential for adverse consequences,” the analysts wrote.

“Unfortunately this new rule is yet another example of a change that does not address or mitigate the event it was supposed to prevent from occurring.”

Stock Trading

 (Reporting by Edward Krudy; Editing by James Dalgleish)

Circuit breaker proposal ineffective: Birinyi