Institute Submits Statement
on Stock Market Circuit Breakers

Washington, DC, February 13, 1998 - On January 29, the Subcommittee on Securities of the Senate Committee on Banking, Housing, and Urban Affairs held hearings on market circuit breakers and heard testimony from SEC Chairman Arthur Levitt. The Institute filed a Statement for the Record before the Senate Banking Committee. In addition, on February 5, the New York Stock Exchange ("NYSE") approved an amendment to its rules governing circuit breakers.

SEC Chairman Levitt's Testimony
In his testimony before the Senate Subcommittee on Securities, Chairman Levitt summarized recent market events and recommended certain changes to the circuit breaker rules. First, Levitt recommended that circuit breakers be triggered only in extraordinary circumstances, such as in "a severe market decline where prices dropped so dramatically that liquidity and credit dry up or when prices threaten to cascade in a panic-driven spiral." He expressed concern that mutual funds be able to calculate daily net asset values using current prices, and warned that because the world markets look to the U.S. financial markets for leadership, closing the markets at any time risks creating the impression that the U.S. markets cannot function.

Second, Levitt recommended that the current circuit breaker trigger points be raised. He noted the Commission's interest in proposals that would change the limits from a fixed point amount to a point amount based upon a percentage drop in the Dow Jones Industrial Average ("DJIA"), and stated that because of advances in technology, the exchanges should reevaluate their circuit breaker rules periodically and make changes as appropriate.

Finally, Levitt recommended that the markets have an orderly close every day. He explained that the purpose of the circuit breakers is to provide a brief pause in trading, rather than to halt trading for the day. Levitt noted that some attempt should be made to reopen the markets closed by circuit breakers, even if the circuit breakers are triggered late in the trading day. He explained that because mutual fund investors have come to rely on the markets being open until 4:00 pm, early closes that prevent them from making their trades at that day's net asset value could undermine their confidence in the financial markets.

NYSE Rule Proposal
On February 5, the NYSE Board of Directors approved amendments to NYSE Rule 80B that would increase the circuit breaker levels to ten, twenty, and thirty percent of the DJIA. The NYSE proposal, which is subject to SEC approval and which focuses on percentages rather than strictly on points, was motivated by the circuit breakers' first-ever activation on October 27, when the exchange was shut down when the Dow industrials fell 554.26 points, which set off the 550 point trigger.

The NYSE proposal is as follows: (1) a ten percent drop would halt trading for one hour if it occurred before 2:00 pm, and for thirty minutes if it occurred between 2:00 and 2:30, but would not halt trading at all after 2:30; (2) a twenty percent drop occurring before 1:00 pm would halt trading for two hours, and between 1:00 pm and 2:00 pm for one hour, and close the market for the day after 2:00 pm; and (3) a thirty percent drop would close the market for the day no matter when it occurred.

Institute Statement for the Record
In a Statement for the Record before the Senate Banking Committee, the Institute expressed its views on the market circuit breakers and the NYSE proposal, noting its support of the NYSE's proposed increase in circuit breaker levels. The statement pointed out that basing the levels on percentage changes in the market rather than on specified point changes will ensure that the triggering points correspond to significant changes in the markets. Although agreeing that raising the levels at which the market would close would minimize the potential for premature closings, the statement stressed that any trading halt that would cause the markets to close earlier than the normal 4:00 pm, as would be the case under the NYSE proposal, should be avoided. The statement emphasized that it is critical that the markets remain open for a sufficient period of time at the end of the day (e.g., an hour) in order to allow the markets to stabilize. To do otherwise could be harmful to the millions of mutual fund shareholders who have come to expect that orders placed up until that time will get that day's net asset value.