Understanding Stock Market Circuit Breaker History and Purpose

The stock market circuit breaker is a crucial mechanism designed to prevent catastrophic losses and maintain market stability.

Introduced in 1988, the first circuit breaker was set to halt trading for 30 minutes if the Dow Jones Industrial Average (DJIA) fell by 10% in a single day.

The purpose of the circuit breaker is to give investors time to reassess the market and prevent a complete meltdown.

In 1990, the circuit breaker was modified to halt trading for 30 minutes if the DJIA fell by 10% or more during a single day.

A circuit breaker is a mechanism designed to halt trading in a specific market or security when it experiences a sharp decline.

Circuit breakers are triggered by sharp declines in market indices or individual securities.

The specific thresholds for triggering a circuit breaker vary depending on the type of circuit breaker and the rules of the particular exchange.

In the U.S., market-wide circuit breakers are triggered by sharp declines in the S&P 500 index.

The thresholds are set at the beginning of each quarter based on the average closing price of the S&P 500 index for the previous month.

Single-security circuit breakers are triggered by sharp price moves in a particular security.

The thresholds for triggering a single-security circuit breaker vary depending on the price and trading volume of the security.

The concept of circuit breakers was introduced after the stock market crash of October 19, 1987, given the title of Black Monday.

The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 (22.61%) on that day.

The U.S. Securities and Exchange Commission (SEC) introduced circuit breakers in response to this crash to prevent similar situations from happening again.

The idea behind circuit breakers was to provide a cooling-off period during large market declines for investors to make rational decisions.

The first marketwide circuit breaker halts were implemented on Wall Street in 1988.

Circuit breakers were initially triggered frequently during their first few years, but major adjustments were made in 1997 after a global "mini-crash" occurred on October 27.

Since 1997, marketwide circuit breakers have only been triggered four times – all in March of 2020.

The rules and thresholds for triggering circuit breakers have been revised several times, most notably after the May 6, 2010 “Flash Crash”.

Circuit breakers are designed to prevent a free-fall in the market by giving traders a breather to make informed decisions. They provide a pause in trading to prevent panic selling.

The main function of a market circuit breaker is to provide a cooling-off period during periods of extreme market volatility. By pausing trading, circuit breakers can help restore order to the markets.

Circuit breakers are triggered at specific thresholds, such as a 7% drop in the S&P 500 index. This pause in trading is only for 15 minutes, allowing traders to reassess the market.

Marketwide circuit breakers are based on declines in the S&P 500 index within a single session. Trading is halted for the remainder of the day if the index drops a full 20%.

Limit Up-Limit Down (LULD) circuit breakers are designed to curb both panic selling and manic buying. These circuit breakers are triggered if a stock's price moves outside of specified price bands, such as a 20% drop.

Market volatility regulations, including circuit breakers, can prevent panic selling and extreme price volatility by pausing trading during periods of extreme market volatility.

Trading halts for severe price decline can have significant effects on market liquidity and volatility, creating uncertainty and potentially exacerbating price moves when trading resumes.

Circuit breakers can help restore order to the markets by providing a cooling-off period during periods of extreme market volatility.

The decision to resume trading after a circuit breaker is triggered is typically made by the exchange in consultation with market participants and regulators, depending on the rules of the particular exchange and the type of circuit breaker that was triggered.

Individual stock price limits and trading halts for severe price decline are designed to prevent extreme price volatility in individual securities.

These rules are triggered when the price moves by more than 10% in five minutes for stocks in the S&P 500 index, Russell 1000 Index, and some other actively traded securities and ETFs.

Trading halts can have a significant impact on the price discovery process, which is the process in which a security's market value is determined by way of buyers and sellers agreeing on a price suitable enough for a transaction to take place.

A stock market crash, like the 2010 Flash Crash, can lead to trading halts and circuit breakers being triggered, as the SEC announced a trial period of per-stock trading curbs after the event.

Stock index futures also have circuit breakers, with thresholds typically the same as those for the underlying stock index.

Stock price limits and trading halts are in place to prevent extreme price volatility in individual securities. These rules are designed to prevent extreme price volatility in individual securities.

In the U.S., a trading halt for severe price decline in an individual security is triggered when the price moves by more than 10% in five minutes for stocks in the S&P 500 index, Russell 1000 Index, and some other actively traded securities and ETFs.

Stock market crashes can be a result of extreme price volatility, and trading halts are put in place to prevent this. The 2010 Flash Crash, for example, led to a trial period of per-stock trading curbs.

Stock index futures also have circuit breakers, with thresholds for triggering circuit breakers being the same as those for the underlying stock index. This means that if a circuit breaker is triggered in the futures market, trading in the corresponding stock index is also typically halted.

The flow of information is reduced when trading halts occur, causing larger than normal bid-ask spreads that slows down the price discovery process. This can lead to abnormal trading volume and volatility when stock-specific trading halts occur.

A notable example of the impact of trading halts is the 2010 Flash Crash, after which the SEC announced a trial period of per-stock trading curbs.

Program trading curbs were implemented by the NYSE to limit volatility.

The NYSE defined a program trade as a basket of stocks from the S&P 500 with at least 15 stocks or a value of at least $1 million.

Program trades are generally automated and restricted by the curb to sell on upticks and buy only on downticks.

The trading curbs were activated when the NYSE Composite Index moved 190 points or the Dow Jones Industrial Average moved 2% from its previous close.

They remained in place for the rest of the trading day or until the NYSE Composite Index moved to within 90 points or the Dow moved within 1% of the previous close.

Over 50% of all trades on the NYSE are program trades, which made this curb significant in its purpose of limiting volatility.

The NYSE scrapped this rule on November 2, 2007, citing its ineffectiveness in curbing market volatility since its enactment in 1987.