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Rule 48: What Is It and Why the NYSE Invoked it on Monday

The New York Stock Exchange invoked a seldom used mechanism known as Rule 48 to pre-empt panic selling at the stock market open on Monday.
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In an historic move, the New York Stock Exchangeinvoked the little-used Rule 48 to pre-empt panic selling at the stock market open on Monday. This followed a dramatic drop in pre-market open futures, with the Dow Jones Industrial Average futures falling more than 700 points.

UPDATE 8/25: Dow Dives at Close as Analysts Warn of More Trouble Ahead

The goal of Rule 48 is to ensure orderly trading amid financial market turbulence. It's only used in the event that extremely high market volatility is likely to have a floor-wide impact on the ability of designated market makers (DMMs) to disseminate price indications before the bell.

Unlike a circuit breaker that stops stock trading, Rule 48 makes it easier and faster to open the stock markets when there are fears that the market could open with a lot of volatility that would disrupt trading. Futures trading on Monday morning had the Dow Jones Industrial Average down by more than 700 points.

Rule 48 speeds up the opening by suspending the requirement that stock prices be announced at the market open. Those prices have to be approved by stock market floor managers before trading actually begins. Without that approval, stock trading can begin sooner.

How do market circuit breakers work?

To invoke Rule 48, an exchange must determine that certain conditions exist that would cause market disruptions. Those conditions include:

  • volatility during the previous day's trading session;
  • trading in foreign markets before the open;
  • substantial activity in the futures market before the open;
  • the volume of pre-opening indications of interest;
  • government announcements.

Rule 48 was approved by the Securities and Exchange Commission on Dec. 6, 2007, and has been rarely used.

Rule 48 was invoked a few times in recent years, including on Jan. 22, 2008, and on May 20, 2010. In 2008, the stock markets were subject to great volatility over fears of a global recession and in 2010, the European debt crisis caused panic buying and selling. The rule was also invoked during the August-September 2011 time frame, when European debt crisis fears again roiled the markets, and in early 2015, when massive snowstorms swept across the U.S.