‘Circuit breakers’ halt US stock trading. What are they exactly?

Curbs on trading give investors time to digest sharp price drops, with the goal of stemming panic.

NYSE circuit breakers
On Monday, circuit breakers halted trading for 15 minutes right after the open on Wall Street, after the S&P 500 dropped seven percent from the previous session's closing level [Bryan R Smith/Reuters]

On Monday, United States stock prices plummeted at the open of trading, triggering so-called circuit breakers that halt trading to prevent a further rout.

Like subways and trains, the stock market has a circuit breaker system in place to stop dangerous increases in speed, giving investors time to digest the situation and – with any luck – stem panic and allow cooler heads to prevail.

Which markets are covered by circuit breakers?
Market-wide circuit breakers (MWCB) for the New York Stock Exchange (NYSE) apply to US equity and options markets and kick in when the S&P 500 Index – a proxy for US retirement savings accounts and college savings plans – experiences a dramatic decrease in value from the previous session’s close.

How big of a decrease in value are we talking here?
There are three levels of drops that initiate circuit breakers on the NYSE: 7 percent, 13 percent and 20 percent off the closing price from the previous session of trading.

What are the scenarios for each halt?
A Level 1 halt occurs when the S&P 500 Index experiences a seven percent drop, halting trading for 15 minutes before 3:25 pm in New York.

A Level 2 drop triggers another 15-minute stop in trading if total losses for the session fall to 13 percent.

If markets experience a Level 3 drop of 20 percent, trading is suspended entirely for the rest of the session.

When was the last time this happened?
The seven percent circuit breaker was triggered early in trading on Monday March 9, 2020. The last time it was triggered prior to that was on December 1, 2008 – as the world was reeling from the global financial crisis.

Are there other kinds of circuit breakers? Like for individual securities?
There sure are, but unlike market-wide breakers, individual-stock circuit breakers apply when the price moves dramatically up or down by 10 percent. Halting a stock that moves up or down too quickly within a five-minute period, is known as a “Volatility Pause”. Such a standdown is used to smooth volatility and prevent flash crashes. Another reason an individual stock may be halted is for pending news from the company.

Have circuit breakers always been a feature of stock markets?
No. The first ones were not put into place until after the crash of October 19, 1987, on what is now called Black Monday. The Dow Jones Industrial Average lost over 22.6 percent if its value that day. But those inaugural circuit breakers failed to halt the so-called flash crash of May, 2010. The US Securities and Exchange Commission (SEC) updated its system by implementing a market-wide circuit breaker system in February, 2013 to curb panic selling.  

Who came up with the idea for circuit breakers?
Just three weeks after Black Monday in 1987, then-US President Ronald Reagan established the Presidential Task Force on Market Mechanisms. The task force, led by former US Secretary of the Treasury Nicholas Brady, produced the 1988 Brady Commission report recommending the implementation of circuit breakers to prevent further mass selloffs.

Source: Al Jazeera