Placing the mode selector in standby ensures that there is no chance of an incorrect code being diplayed on the controllers display as you cycle through the numbers.
Example - Current code 7000, new code 1234. If one changes the 7 to 1 but take some time, the transponder may transmit 1000 which could be assigned to another aircraft.
Thus the recomended practice has been to turn the transponder to standby while selecting a new code.
However, in standby, no mode C is transmitted and this has safety implications for both the TCAS system and for ATC conflict alert.
Consequently, current practice is to leave the transponder operating while changing the code but;
a. Don't hang about when changing; and
b. Avoid cycling through any of the special purpose codes.
From an ATC point of view, when a transponder response is lost, the system will plot the aircraft in the expected position for the next few updates but without any mode C readout. If you happen to be on a code assigned to another aircraft as the transponder responds, the display may drop your callsign and that of the other aircraft but the mode C will remain. IN some systems, this will generate a low level warning regarding a duplicate squalk but provided you quickly move off that squalk by the next response, the warning will be cancelled.
As a guide, most enroute radars turn at about 10 RPM these days so for a single radar head, your transponder will be interrogated every 6 seconds. Approach radars are usually 15RPM (4 second updates) or better.
Regards,
DFC