A 7 per­cent plunge trig­gers the cir­cuit breaker and sends global mar­kets reel­ing.

The Denver Post - - FRONT PAGE - By Nick Baker

Bloomberg News T he man re­spon­si­ble for stock cir­cuit break­ers says Chi­nese of­fi­cials must re­vise their safety net to avoid cre­at­ing panic, join­ing crit­ics who ar­gue the na­tion’s trad­ing halts are trig­gered too eas­ily for such a volatile mar­ket.

“They’re just on the wrong track,” said Ni­cholas Brady, 85, the for­mer U.S. Trea­sury sec­re­tary who ran a com­mit­tee that rec­om­mended the curbs on eq­uity trad­ing af­ter the 1987 crash. “They need a set of cir­cuit break­ers that ap­pro­pri­ately re­flects their mar­ket.”

Brady spoke Thurs­day af­ter Chi­nese reg­u­la­tors sus­pended their newly in­tro­duced pro­gram that ends stock trad­ing for the en­tire day af­ter a 7 per­cent plunge. The halt was set off twice in its first week of op­er­a­tion, bol­ster­ing spec­u­la­tion China set its thresh­old too low.

“The right thing to do is to widen their band,” Brady said in an in­ter­view.

The U.S. con­fronted a sim­i­lar prob­lem in the 1990s. The curb that the Brady Com­mis­sion helped im­ple­ment shut the mar­ket for the first time on Oct. 27, 1997, when the Dow Jones In­dus­try Av­er­age lost 554 points. That was only a 7.2 per­cent de­cline, al­most iden­ti­cal to the Thurs­day plunge in China’s CSI 300 In­dex.

The trou­ble was that a decade­long surge in U.S. stock prices had di­min­ished the value of each point in the Dow. The 1987 crash’s 508-point slump had amounted to a 23 per­cent tum­ble, three times greater than the de­cline that froze trad­ing 10 years later. Reg­u­la­tors and ex­changes pushed through a re­vi­sion: If the Dow fell

10 per­cent, there would be an hour pause. At 20 per­cent, trad­ing would cease for two hours, and at 30 per­cent, the day would end early.

In re­cent years, the bench­mark that trig­gers the halts switched to the Stan­dard & Poor’s 500 In­dex, and the lev­els changed. Now it takes 7 per­cent and 13 per­cent drops to prompt a brief pause, and a 20 per­cent de­cline to close mar­kets early for the day.

Whereas 7 per­cent losses are rare in the U.S. — they were only com­mon dur­ing the 2008 fi­nan­cial cri­sis, Oc­to­ber 1987 and the Great De­pres­sion — Chi­nese shares dropped about that much seven times in the past year.

“I don’t think this is an ex­act science,” said Sang Lee, an an­a­lyst at fi­nan­cial-mar­kets re­searcher Aite Group. With cir­cuit break­ers, “If you set th­ese too low, in­stead of eas­ing volatil­ity it may in­crease volatil­ity.”

That echoes the view of Brady, who was chair­man of Wall Street pow­er­house Dil­lon Read & Co. when Pres­i­dent Ron­ald Rea­gan asked him to fig­ure out what hap­pened dur­ing the 1987 crash and pro­pose so­lu­tions.

Brady de­serves credit for in­tro­duc­ing cir­cuit break­ers, ac­cord­ing to Robert Glauber, a Har­vard Univer­sity lec­turer who ad­vised the Brady Com­mis­sion and once ran the Na­tional As­so­ci­a­tion of Se­cu­ri­ties Deal­ers.

“Brady was wor­ried then and wor­ried now that the pace of mar­kets was go­ing faster than peo­ple could cal­cu­late,” Glauber said Thurs­day. “What you really needed was a time out. That’s what we pro­posed.”

The ba­sic idea was to give hu­mans time to re­flect on what just hap­pened fol­low­ing a plunge, to de­cide whether losses had gone too far and whether it was time to buy.

“If any­thing, it’s more nec­es­sary now be­cause com­put­ers are faster and peo­ple’s brains are about the same speed,” Glauber said.

The China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion said late Thurs­day that it was sus­pend­ing the cir­cuit­break­ers pro­gram, adding to con­cern pol­i­cy­mak­ers are strug­gling with how to con­tain tur­moil in the na­tion’s fi­nan­cial mar­kets. Of­fi­cials went to ex­treme lengths to sup­port shares in the midst of a $5 tril­lion rout last sum­mer, in­clud­ing or­der­ing stock pur­chases by state funds, sus­pend­ing ini­tial pub­lic of­fer­ings and al­low­ing trad­ing halts that froze hun­dreds of shares.

Some in­vestors in China said the cir­cuit breaker ac­tu­ally in­ten­si­fied losses, prompt­ing traders to dump shares out of fear they’d be stuck hold­ing stock if the pause was trig­gered.

That con­flicts with Brady’s vi­sion for what cir­cuit break­ers are meant to do. He said his in­no­va­tion stemmed from a con­struc­tion job he once had. In the world of elec­tron­ics, cir­cuit break­ers pre­vent dam­age by switch­ing off a cir­cuit when there’s an over­whelm­ing surge of power.

“The cir­cuit breaker that I in­vented re­stores calm,” he said.

-7% beijing: A woman re­acts to the plunge in the Shang­hai Com­pos­ite In­dex at a bro­ker­age in Beijing on Thurs­day. The nose dive trig­gered a halt in trad­ing and sent mar­kets across the globe tum­bling. Ng Han Guan, The As­so­ci­ated Press

-3.1% hong kong: A man walks past a board dis­play­ing the bench­mark Hang Seng In­dex.

-2.3% ja­pan: A man looks at an elec­tronic stock board of a se­cu­ri­ties firm in Tokyo.

-2.3% u.s.: A screen shows the mar­ket move­ments at the New York Stock Ex­change.

Ni­cholas Brady cre­ated cir­cuit break­ers for the U.S. mar­ket.

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