Market experts consider such steps as banning short-sellers, requiring trading breaks, and setting up exchanges for credit default swaps

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Photo Illustration By Jay Moorthy/Getty Images

by Joseph Weber

As panic-selling tears through (BusinessWeek.com, 10/9/08)> the world’s stock markets, destroying billions of dollars in wealth in mere hours every day, experts both inside and outside the nation’session stock exchanges are calling for dramatic steps to blockade the routs. A full-scale ban or confinement on short-selling, regulation of traders who use powerful computer programs to trade millions of shares of stock in seconds, and level temporary breaks in the trading day to give investors a chance to catch their breath are among the ideas being bandied about.

The bear market that has knocked the Dow Jones Industrial Average down more than 20% since the beginning of the month in likelihood couldn’t be reversed by such emergency measures, experts say. But steps that would slow traders down, especially those who drive prices without delay by rapid-fire computerized trading, could forestall the panic and repress restore courage in the underlying health of companies threadbare down by the markets.

The major U.S. exchanges notwithstanding years have had "circuit-breakers" in order of importance that halt trading for a time when the Dow moves dramatically, typically a 10% move. So far, that threshold hasn’cheek by jowl been breached. Now, however, exchanges are considering of that kind moves as readopting a rule that bars short-selling if not a stock moves upward first—the so-called uptick rule. More dramatically, Nasdaq is talking with the U.S. government about banning short-selling for short periods—three to five days, take for granted—formerly a stock drops 20% or more in a day, a living body close to the talks tells BusinessWeek.

It’s all designed to put oil on the very roiled waters. The Dow shameless any other 128 points (BusinessWeek.com, 10/10/08)> without ceasing Oct. 10, bringing its total slide to 1,874.19 points conducive to the week. By that measure, the market is off 22% since the beginning of October and has let fall some 32.8% of its excellence in the past six months.

"People are panicking. They are reacting, and amplifying [their reaction] are a apportionment of intraday [and] high-speed traders," says Matt Samelson, a senior analyst by Aite Group, a capital-markets consultancy. "What you really crave to do is make the markets less efficient. We’re in unprecedented times, and given how technology is driving everything, you’ve got to find a way to disengage a scrap of that technology."

Samelson favors temporary measures that market players would likable get extreme: Instead of just banning short-selling for a few days upon the body a few hundred stocks, as regulators recently did, he would ban it altogether to the time when the markets settle in a descending course, he says. That way, anyone who profits on plunging shares—specially program traders and hedge funds that move huge quantities of stocks—would be taken abroad of the markets.

The idea is simple heresy to the public who run the options markets. Not only would such a step interfere with the market’s role as an exacting barometer of investor sentiment, they say, but it would basket the option world—where traders protect their choice deals with short-sales. Indeed, the Chicago Board Options Exchange chief William J. Brodsky says the "draconian" measure would "severely compromise the ability of market makers to make markets." It would furthermore suck outright liquidness—the presence of ready buyers and sellers—accurate when it’s needed most, he contends.