Nexus: Chapman's Journal of Law and Public Policy

Between the morning of October 19, 1987 and the closing bell of October 20, 1987, the Dow Jones Industrial Average fell 25%. Shunning the drastic remedy of closing the markets (akin to FDR’s “bank holiday” of March 1933), the regulatory response ultimately took the form of ‘circuit breakers,’ crudely fashioned trading halts that some critics described as “throwing sand in the gears.”

The trigger points for these market shutdowns remained constant from their implementation in April 1989 until April 1998. At that time, the calibration of the decline prompting a trading halt was changed from an absolute number to a percentage of the average closing values of the prior month. That percentage calculation was not altered until December 31, 2008. Consequentially, between October 2007 and February 2009 – as an inflated DJIA gradually declined over 40% - the breakers were not triggered, raising questions concerning their purpose and effect.

Specifically, is an unceasing, 18-month stock market decline preferable to a short-lived stock market plunge? If so, are predetermined index parameters the optimum means of thinning investor pain? And if so, might not the same thinking inspire controls on a rising market?

Regardless of opinions on the authenticity of a 14,000 DJIA, the fact remains that the White House (and many others) have pinned the hopes for an economic turnaround on the health of the index. Accordingly, now more than ever, the methods by which the stock exchanges protect, prop up and/or curtail that index warrant examination.

J. Scott Colesanti is an Assistant Professor at the Hofstra University School of Law, teaching, among other courses, Securities Regulation and Broker-Dealer Regulation. Professor Colesanti previously taught at Saint Louis University, and is a member of the Bars of New York, Missouri, and Washington, D.C. He received his J.D. from Fordham Law School and his LL.M. in Corporate Law from New York University. During his 11-year tenure with the New York Stock Exchange, Professor Colesanti served as Trial Counsel for its Division of Enforcement, in which capacity he handled investigations, disciplinary hearings, and appeals before the NYSE Board of Directors and the Securities and Exchange Commission.

Professor Colesanti is on the Board of Editors of The Journal of Securities Law, Regulation & Compliance and has adjudicated securities industry disputes as an arbitrator since 2000. His writings have been published in financial industry journals, law reviews, The New York Law Journal and The New York Business Law Journal, and have appeared as expert commentaries on LexisNexis.