Shock therapy

17 May 2010 By Rolfe Winkler

It makes sense to coordinate circuitbreakers and other safety switches across trading venues. But the goal shouldn t be to eliminate sudden drops. Markets are volatile, and smart traders build in a margin of safety. That s a message reinforced by the odd surprise.

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The Dow Jones Industrial Average plunged nearly 1,000 points and then recovered much of its losses during a 20 minute period of trading on the afternoon of May 6. Measured in points, it was the largest intraday trading drop in the history of the index.

The point drop was not large enough to trigger equity marketwide circuit breakers, which halt trading for specified periods depending on the size and time of stock price decline. But the market move did trigger socalled liquidity replenishment points at the New York Stock Exchange, suspending automated trading of stocks on the NYSE but not elsewhere.

A large order in emini future contracts by Waddell & Reed may have contributed to the selloff.

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