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Cross-Market Trading Circuit Breakers

Circuit breakers are the markets' or exchanges' established, coordinated strategy for dealing with extraordinary market volatility, specifically extreme market price declines.

Trading circuit breakers, when tripped, halt cross-market trading for several minutes, a few hours or for the rest of the day. The duration of the cross-market trading pause depends on the severity of the market price decline, measured using the Dow Jones Industrial Average (DJIA).

Trading circuit breakers work pretty much the same way that electrical circuit breakers work. Electrical circuit breakers refer to electrical switches that are designed to interrupt the flow of electricity in a circuit whenever a fault (e.g. an overload or a short) is detected. The circuit breakers of securities and future markets, on the other hand, are designed to stop cross-market trading whenever the overall market becomes overly volatile.

The Importance of Trading Circuit Breakers

Trading circuit breakers are in place to protect the investors in conditions of extreme market volatility. A sudden decline and significant decline in market prices severely reduces market liquidity. If trading is allowed to continue in such conditions, investors would be overly stretched, and the odds of making unwise investment decisions increase phenomenally.

If trading is paused, on the other hand, investors are given a much needed breathing room. They have time and space to think, evaluate their investments, digest new and relevant information, and formulate a plan for dealing with the market downturn.

When Cross-Market Circuit Breakers are Tripped

Cross-market circuit breakers are "tripped" whenever there's a single-day decline of 10%, 20% and 30% in the DJIA starting point for the quarter. At the time of writing (and according to the NYSE),

the 10% trigger level corresponds to a 1050-point decline in the DJIA,
the 20% trigger level corresponds to a 2100-point decline in the DJIA, and
the 30% trigger level corresponds to a 3150-point decline in the DJIA.

The following refers to the duration of cross-market trading halts whenever a circuit breaker threshold is breached:

For a market price decline of 10%
- If the 10% decline registers before 2pm, cross-market trading would pause for one hour.
- If the 10% decline registers anytime from 2:00pm to 2:30pm, cross-market trading would pause for 30 minutes.
- If the 10% decline registers after 2pm, cross-market trading would not stop at all.
For a market-price decline of 20%
- If the 20% decline registers before 1pm, cross-market trading would stop for two hours.
- If the 20% decline registers anytime from 1pm to 2pm, cross-market trading would stop for one hour.
- If the 20% decline registers after 2pm, the markets would close and cross-market trading would stop for the day.
For a market-price decline of 30%
- If a 30% market decline registers at anytime, the markets would close for the day and cross-market trading would instantly stop.

The above trigger points and trading halt particulars are followed market-wide. They are found in the amended Rule 80B of the New York Stock Exchange.

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