What is the Purpose of a Circuit Breaker for the Market?

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On Monday, March 9, 2020 something that rarely happens took place. When the S&P500 dropped 7% within 3 minutes of the markets open, it triggered a 15 minute closure of the market known as a circuit breaker. The equities and options exchanges, according to the New York Stock Exchange, have procedures to kick in a coordinated trade halt if a major market decline threatens vanquish liquidity levels.

The Three Levels of Circuit Breakers

According to Vanguard, there are three levels of market circuit breakers. These take place when a certain percentage decline from the previous day’s market close hits and they are as follows:

Level 1: 7% decline, trades halt for 15 minutes if it occurs before 3:25 pm. After 3:25 pm, trading continues unless there is a level 3 halt.

Level 2: 13% decline, trades halt for 15 minutes if it occurs before 3:25 pm. After 3:25 pm, trading continues unless there is a level 3 halt.

Level 3: 20% decline, if this occurs any time during the trading day, trading halts for the remainder of the day.

What about single stocks?

Single stocks can be subject to circuit breakers. For example, on Monday’s circuit breaker activity, the Halliburton stock which endured three trading halts within an hour of the market open.

Single stocks are subject to a different set of rules and are subject to a different set of levels and tiers. You can find more details on these rules here.

A New Reality?

As of our publishing, the DOW experienced its biggest drop, 10% for the day, since the 1987 market crash. As we move into potential bear territory, we might be seeing more circuit breakers in the coming months.

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