What is a circuit breaker in stock market? How does it work?

What is a circuit breaker in stock market? How does it work? And what is a trading halt?

Though these are rare occurrences but market situations like today can trigger these rare triggers.

A trading halts, sometimes referred to as a circuit breaker is a financial regulatory instrument that is in place to prevent stock market crashes from occurring. As a result, circuit breakers stop trading as per rules in order to allow accurate information to flow amongst market participants.

As a reminder, on Monday 9 Mar20, Asian markets on average have crashed over 4% and ES Mini S&P500 futures, Nasdaq futures are all in locked limit down trading halts.

What is S&P500 circuit breaker? How does it trigger?

For the New York Stock Exchange (NYSE) circuit breakers have three tiers. These circuit breakers react to the price change in the S&P 500. The first tier is a 7% decline in the S&P 500. Should that occur, trading will pause for 15 minutes. The next level is a 13% decline, that causes another 15 minute pause if it happens on or before 3.25pm. Finally should the markets fall 20% the markets will close for the day.

All these price changes are relative to the previous trading day’s close.

Let’s go into more details.

According to Regulatory Circular RG13-012:

CFE Rule 417A. Market-Wide Trading Halts Due to Extraordinary Market Volatility

(a) The Exchange will halt trading in all Contracts and shall not reopen for the time periods specified in this Rule if there is a Level 1, 2 or 3 Market Decline.

(b) For purposes of this Rule:

(i) A “Market Decline” means a decline in price of the S&P 500 Index between 8:30 a.m. and 3:00 p.m. (all times are CT) on a trading day as compared to the closing price of the S&P 500 Index for the immediately preceding trading day. The Level 1, Level 2 and Level 3 Market Declines that will be applicable for the trading day will be the levels publicly disseminated by securities information processors.

(ii) A “Level 1 Market Decline” means a Market Decline of 7%.

(iii) A “Level 2 Market Decline” means a Market Decline of 13%.

(iv) A “Level 3 Market Decline” means a Market Decline of 20%.

(c) Halts in Trading:

(i) If a Level 1 or Level 2 Market Decline occurs after 8:30 a.m. and up to and including 2:25 p.m. or, in the case of an early scheduled close, 11:25 a.m., the Exchange shall halt trading in all Contracts for 15 minutes after a Level 1 or Level 2 Market Decline. The Exchange shall halt trading based on a Level 1 or Level 2 Market Decline only once per trading day. The Exchange will not halt trading if a Level 1 or Level 2 Market Decline occurs after 2:25 p.m. or, in the case of an early scheduled close, 11:25 a.m.

(ii) If a Level 3 Market Decline occurs at any time during the trading day, the Exchange shall halt trading in all Contracts until the next trading day. (d) If a circuit breaker is initiated in all Contracts due to a Level 1 or Level 2 Market Decline, the Exchange may resume trading in each Contract anytime after the 15-minute halt period.

(e) This Rule shall become effective on the date that corresponding market-wide trading halt provisions become effective on national securities exchanges.

(f) Nothing in this Rule shall be construed to limit the ability of the Exchange to halt or suspend trading in any Contract pursuant to any other Exchange rule or policy

(Please contact the Helpdesk at [email protected] and (877) 226-3773 for additional information.)

Do you have opened positions as of now? Are you on the bullish side or bearish side? Is this your first time experiencing circuit breaker? How are you handling this circuit breaker in S&P500 and other stock market indices?

 Join the conversation by leaving a comment or question below.

Happy Trading.

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