In the US stock market, circuit breakers are automatic mechanisms that halt trading in response to a significant decline in the S&P 500 index, aiming to prevent panic selling and allow the market to stabilize.
Here's a more detailed explanation:
-
Circuit breakers are designed to slow down the effects of extreme price movements by temporarily halting trading across securities markets when severe price declines reach levels that may exhaust market liquidity.
-
The S&P 500 index is the benchmark for market-wide circuit breakers, and the triggers are based on a percentage decline from the previous day's closing price.
-
There are three levels of circuit breakers:
- Level 1 (7% decline): Halts trading for 15 minutes if the S&P 500 falls 7% below the previous day's close before 3:25 p.m. ET.
- Level 2 (13% decline): Halts trading for 15 minutes if the S&P 500 falls 13% below the previous day's close before 3:25 p.m. ET.
- Level 3 (20% decline): Halts trading for the remainder of the day if the S&P 500 falls 20% below the previous day's close.
- Level 1 (7% decline): Halts trading for 15 minutes if the S&P 500 falls 7% below the previous day's close before 3:25 p.m. ET.
-
- Levels 1 and 2 trigger a 15-minute trading halt if the decline occurs before 3:25 p.m. ET.
- If the decline occurs at or after 3:25 p.m. ET, trading is not halted.
- Level 3 triggers a halt for the rest of the trading day.
- Levels 1 and 2 trigger a 15-minute trading halt if the decline occurs before 3:25 p.m. ET.
-
The current system of circuit breakers has been revised several times based on feedback from past crises, with the first circuit breaker put in place after the Dow Jones Industrial Average dropped nearly 23% on Oct. 19, 1987.
-
If the S&P 500 closes at 4000 on a given day, and the next day it falls to 3720 (a 7% drop), a Level 1 circuit breaker would be triggered, halting trading for 15 minutes.
