What are stock market ‘circuit breakers’ and why was one used to halt trading in the US today?
Trading on the New York Stock Exchange was paused for fifteen minutes today after the S&P 500 fell seven per cent.
The fall triggered what’s known as a circuit breaker, also known as a trading curb, which prevented further falls in the market.
What are circuit breakers?
Circuit breakers are market mechanisms which pause trading on stock exchanges if the value of a share index drops below a certain threshold in a day’s trading.
Trading was paused on the NY Stock Exchange today after it registered a 7 per cent drop
In the case of America’s S&P 500, there are three tiers at which circuit breakers are instituted.
Level One: If the S&P 500 registers a 7 per cent decline, trading pauses for 15 minutes.
Level Two 2: If a 13 per cent fall happens before or at 3:25pm, another 15-minute pause occurs.
Level Three: If markets fall by 20 per cent, they close for the day.
Why are they necessary?
Their main aim is to stop panic-driven stock market crashes and were brought in after what the financial world knows as ‘Black Monday.’
On Monday, October 19, 1987, the Dow Jones experienced its worst one-day percentage fall in history, declining 22.6 per cent.
They were remodelled after they failed to stop the May 2010 ‘Flash Crash.’
Circuit breakers, or trading curbs, temporarily stop panic selling and give investors the ability some time to reflect, understand what the market is doing and make reasoned decisions.
Their use is rare, although they have been revamped multiple times over the years, with their last update taking place in February 2013.
China used them when its stock market was hit by investor panic in 2016. Japan has also employed them.