FOR IMMEDIATE RELEASE                                  98-87

 Division of Market Regulation Issues a Report Entitled 
     "Trading Analysis of October 27 and 28, 1997"

Washington, D.C., September 16, 1998  --  The staff of the
Division of Market Regulation has issued a report, entitled
"Trading Analysis of October 27 and 28, 1997."

     On October 27 and 28, 1997, the nation's securities markets
fell by a record absolute amount on then-record trading volume.
On Monday, October 27, the Dow Jones Industrial Average declined
554.26 points (7.18%) to close at 7161.15.  This represented the
tenth largest percentage decline in the index since 1915.
October 27 was also the first time that the cross-market trading
halt circuit breaker procedures had been used since their
adoption in 1988.  At 2:36 p.m., the DJIA had declined 350
points, thereby triggering a 30-minute halt on the stock,
options, and index futures markets.  After trading resumed at
3:06 p.m., prices fell rapidly to reach the 550-point circuit
breaker level at 3:30 p.m., thereby ending the trading session 30
minutes prior to the normal stock market close.  On Tuesday,
October 28, market prices initially resumed their decline before
rallying sharply.  The DJIA closed up 337.17 points (4.71%) at
7498.32 on then-record share volumes of over a billion shares
each on the New York Stock Exchange and the Nasdaq Stock Market.

     Immediately following October 27 and 28, Chairman Levitt
requested that the Division of Market Regulation reconstruct the
days' events.  The findings from this reconstruction are
discussed in Part II of the Trading Analysis.  The Division was
also asked to determine the effects of circuit breakers on market
price movements.  The Commission's Office of Economic Analysis
helped analyze the effects of the circuit breakers on the
velocity of market price movements and the quality of market-
making on October 27.  The determinations regarding circuit
breakers are discussed in Part III of the report.  Finally, the
Division analyzed the operational performance of the markets'
automated trading, price-reporting, and clearance and settlement
systems on October 27 and 28.  In conjunction with the Division's
analysis, the Commission's Office of Compliance Inspections and
Examinations inspected the systems performance of major full-
service and online broker-dealers.  The findings from these
reviews are discussed in Part IV of the report.

     Overall, the Division's trading reconstruction indicates
that the steep market declines on October 27 and the morning of
October 28 appear to have been a price correction along the lines
of the 6.91% decline on October 13, 1989.  On October 27, 1997,
the selloff appears to have been prompted by concerns over the
potential impact on U.S. corporate earnings of the growing market
turmoil in Asia and the repercussions from the potential economic
slowdown and deflationary pressures.  The Asian market turmoil
evidently caused a number of institutional and professional
traders to attempt to reduce their equity exposure or increase
their hedges in the U.S. markets, either directly through stock
sales or indirectly through trades in futures.  While various
trading strategies and overall liquidity constraints in the stock
and futures markets, as well as concerns over the potential early
closure of the markets on October 27, may have contributed to the
velocity of the price declines, no single factor emerged as the
cause for the price volatility during this period.  When the
selloff reduced U.S. stock prices to attractive levels on the
morning of October 28, broad-based buying developed to support a
strong, albeit partial, bounce-back in share prices on then-
record volumes.

     The market decline on October 27 was not of a magnitude to
offer a true test of how circuit breakers might operate during
more severe declines.  Nevertheless, the Division believes that
the events on October 27 offered several critical insights into
the need to change the circuit breaker procedures then in effect.
The Division discussed these issues with the securities markets
in the context of their revisions to the circuit breaker
procedures which went into effect on April 15, 1998.  In
addition, the Division shared its analyses of the operation of
the circuit breaker on October 27 with the staffs of the other
agencies comprising the President's Working Group on Financial
Markets.  The Division's findings regarding circuit breakers are
discussed below and were reflected in the Working Group Staff
Report on Circuit Breakers, issued on August 18, 1998.

     First, the circuit breaker thresholds needed to be raised
     significantly from those in place on October 27.  When the
     350-point trigger was reached on October 27, the DJIA was
     down only 4.54%, a level that had been reached on 11
     previous days since 1945.  Moreover, there was little
     evidence of the types of market liquidity constraints that
     would have justified cross-market halts.  Circuit breaker
     halts should be reserved for an abrupt market decline of a
     magnitude that raises concerns that the exhaustion of market
     liquidity might result in uncoordinated, ad hoc market
     closures.

     Second, the trading dynamics on October 27 illustrated the
     need for circuit breakers to permit trading to resume
     whenever feasible for orderly market closings.  The early
     market closure on October 27 does not appear to have been
     necessary.  Moreover, investor concerns that the second
     circuit breaker would close the market may have accelerated
     the price declines in the last 24 minutes.  Concerns over a
     likely premature market close may have resulted in a
     transfer of selling pressure to the futures markets (which
     offered faster executions in the limited time remaining),
     with stock prices quickly following futures down to the 550-
     point trigger level.

     Third, the events of October 27 reinforced the need for
     regulators to periodically re-examine circuit breaker
     procedures to ensure that they reflect both changing market
     levels and the increasing capacity of the markets to handle
     greater trading volumes and price volatility in an orderly
     manner.  As markets continue to grow and change, the
     regulatory agencies and the self-regulatory organizations
     must monitor and revise circuit breakers and other
     protective measures to ensure that they continue to function
     as intended and achieve their goals with minimal market
     disruptions.

     Overall, the Division's survey of the securities markets'
systems performance on October 27 and 28 found that the
operational capacity enhancements undertaken over the last ten
years enabled the markets to accommodate the sharp increases in
price volatility and trading volumes on these days with minimal
delays and disruptions.  While some small problems developed in
stock and option quotation systems and Nasdaq, the Division found
no indications of the types of large scale breakdowns in
automated trading systems that had overwhelmed the markets in
October 1987.  In terms of broker-dealer systems, the staff found
that the firms need to do more to evaluate, expand, and test
their systems capacities for peak trading periods.  In addition,
the staff found that online brokerage firms need to do more to
improve their customers' access through the Internet, to respond
promptly to customer complaints, and to educate customers about
the types of access problems that can develop during peak periods
and access alternatives that are available under these
circumstances.

     For further information concerning the Division's Trading
Analysis, contact John Heine at (202) 942-0020.

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