Circuit Breaker Wouldn't Have Stopped Flash Crash: Birinyi
How much would the SEC single-stock circuit breaker have helped on the big market drop on May 6? Birinyi says: not much.
Jeff Rubin at Birinyi Associates put out an interesting note this afternoon, about what would have happened on May 6 if the SEC single stock circuit had been in effect.
I won't go through all the permutations, but his central point is this: the Dow Jones Industrial average would have been down 900 points before a circuit breaker was tripped on the first S&P stock: 3M.
I have not confirmed this data, but Jeff concludes: "The new rule would not only have been ineffective at halting the speed of the decline, but it also would have restricted the speed of the recovery; five of the DJIA's stocks would have been halted on the way back up."
Clearly, a 10 percent drop in a stock (where the circuit breaker kicks in) is a big move down.
But traders very involved in the circuit breaker process have made it clear that their purpose is not to prevent the broad market from selling off when it is legitimate. "It is intended to prevent single stocks from falling in price very rapidly for potentially illegitimate reasons, and give the market time to validate any sharp price decline," one informed trader told me.
With this rule in place:
P&G wouldn't have traded from $55 to $39 in 45 seconds
Accenture wouldn't have traded from $39 to $.01 in 10 seconds
These are good points; the problem is that we do not exactly know what would have happened had there been uniform stock circuit breakers. Also, it is likely circuit breakers would have prevented many stocks (and ETFs!) from going to a penny.