A stock market trading pause is a good idea in an emergency

Opinion: May 25, 2010 at 12:00a.m.

Kansas City Star: Regulators are proposing that trading in certain stocks should pause if the price within a five-minute period goes up or down 10 percent or more. It’s a reasonable response to the “flash crash” of earlier this month, pending a comprehensive diagnosis.

On May 6, the Dow Jones industrial average suddenly plunged nearly 1,000 points in a matter of minutes, followed quickly by a 543-point rise. Nearly 200 stocks momentarily lost virtually all of their value, with prices dropping in some cases to one cent.

That kind of sudden lurch differs from the market action of Thursday, when the Dow lost more than 370 points in a session that was consistently dismal throughout the day.

Surge protectors

If approved by the Securities and Exchange Commission, temporary five-minute “circuit breakers” would go into effect in mid-June, continue for six months and apply to stocks in the S&P 500. After that, officials would decide whether to make the policy permanent.

Clearly, regulatory agencies and the stock exchanges don’t understand the full implications of current computer-trading techniques, in which huge blocks of shares can be exchanged in the blink of an eye.

Regulators are going through computerized trading records in an attempt to discern exactly what happened on May 6 and why. Until we get some answers, a policy of trading pauses makes sense.