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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 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.