NYSE Board Revises Trading Collars and Eliminates Sidecar Rule
NEW YORK, Oct. 5, 1998 -- The New York Stock Exchange Board of Directors today approved amending the rule restricting index arbitrage trading, or trading "collars", revising the set 50-point trigger to
allow the collars to track the movement of the Dow Jones Industrial Average (DJIA).
The Board also approved eliminating the related “sidecar” provisions, which currently restrict program trading orders when the S&P 500 futures contract drops 12-points from the previous day’s
close. When in effect, the sidecar rule diverts program trading orders to a separate file for five minutes and bans for the rest of the day the entry of stop orders1 or stop limit orders2, except for orders of 2,099
shares or less for individual investors.
Both amendments will go into effect following approval by the Securities and Exchange Commission.
Current trading collars restrict index arbitrage orders of the S&P 500 Stock Price Index stocks on a 50-point movement in the DJIA from the previous day’s close. These orders must be entered as buy minus or
sell plus to stabilize market swings. The curbs are removed if the DJIA moves back to or within 25 points of the previous day's close.
The proposed collars will be calculated quarterly as two percent of the average closing value of the DJIA for the last month of the previous quarter3. The calculated two percent value will be rounded down to the
nearest 10 points, and be implemented as follows:
- A decline in the DJIA of the predetermined two percent value would require all index arbitrage sell orders of the S&P 500 stocks to be stabilizing, or sell plus4, for the remainder of the day, unless on
the same trading day, the DJIA advances to a value of at least one-half of the two percent below its previous close.
- An advance in the DJIA of the predetermined two percent value would require all index arbitrage buy orders of the S&P 500 stocks to be stabilizing, or buy minus5, for the remainder of the day, unless the
DJIA retreats to a value equal to one-half of the two percent above its previous close.
- The restrictions will be re-imposed each time the DJIA advances or declines the predetermined amount.
Trading collars were first implemented in July 1990 in response to concerns that index arbitrage may have aggravated large market swings. When implemented, the collars represented an approximate two percent move in
the DJIA. The proposed amendment takes into account the dramatic advances in the DJIA over the past few years. If already in effect, the trading collar trigger for 4th quarter 1998 would be 150 points.
Widely credited for helping reduce market volatility, trading collars were triggered 23 times on 22 days in 1990; 16 times in 1992; nine times in 1993; 30 times on 28 days in 1994; 29 times on 28 days in 1995; 119
times on 101 days in 1996; 303 times on 219 days in 1997; and 313 times on 192 days as of Oct. 30, 1998.
1 A stop order is an order to buy at a price above or sell at a price below the current market that becomes executable when a transaction occurs at or above the stop price (buy stop order) or at or below the stop price (sell stop order). Stop buy orders are generally used to limit loss or protect unrealized profits on a short sale; stop sell orders are generally used to protect unrealized profits or limit loss on a holding.
2 A stop limit order is a stop order which becomes a limit order after the specified stop price has been reached.
3 The calculation is similar to the related “circuit breaker” triggers that halt trading for a specified period of time on a decline in the DJIA. The revised circuit breakers were implemented last April and are determined as a 10, 20 or 30 percent value of the average closing of the DJIA for the last month of the previous quarter. Circuit breaker levels for the 4th quarter are at 800, 1600, and 2,350 points, respectively, for the three levels.
4 A market order to sell “plus” is a market order to sell a stated amount of a stock provided that the price to be obtained is not lower than the last sale if the last sale was a “plus” or “zero plus” tick, and is not lower than the last sale plus the minimum fractional change in the stock if the last sale was a “minus” or “zero minus” tick. A limited price order to sell “plus” would have the additional restriction of stating the lowest price at which it could be executed.
5 A buy “minus” is a market order to buy a stated amount of a stock provided that the price to be obtained is not higher than the last sale if the last sale was a “minus” or “zero minus” tick, and is not higher than the last sale minus the minimum fractional change in the stock if the last sale was a “plus” or “zero plus’ tick. A limited price order to buy “ minus” would have the additional restriction of stating the highest price at which it could be executed.