Here’s what you need to know about ‘circuit breakers’

Stock trading has been halted market-wide 3x in a week by “circuit breakers,” but traders can’t agree whether the policy is helpful or harmful.

March 16, 2020

Yesterday, America’s 3 major stock indexes — the S&P 500, the Dow Jones, and the Nasdaq — halted stock trading for 15 minutes after indexes dropped ~7% in early trading. …

It was the 3rd time in a week that exchanges triggered so-called circuit breakers, but traders disagreed about whether they’re helping or hurting.

Circuit breakers are supposed to stop sell-offs

They were created after the 1987 stock-market crash — when markets slid 22.6% in a single day — to prevent panic-selling by halting trading during steep swings.

Under current rules, circuit breaker have 3 levels:

  • Level 1 = After a 7% drop from the previous day’s close, trading halts for 15 minutes 
  • Level 2 = After a 13% drop, trading halts for 15 minutes 
  • Level 3 = After a 20% drop, trading halts for the rest of the day (The trading day runs from 9:30am to 4:00pm ET.) 

To date, there have never been Level 2 or Level 3 circuit breakers.

And on top of market-wide breakers, individual stocks have them, too. They go into effect when single stock prices swing 5% in 5 minutes.

Last Thursday, 781 stocks halted trading — more than the entire months of January and February combined.

Traders disagree on whether circuit breakers are worth it

Proponents say circuit breakers stabilize markets by calming investors. 

But opponents argue they can cause more chaos by scaring investors at the start of the day. (In 2016 Chinese exchange regulators suspended a circuit breaker when it worsened market losses).

The only thing traders agreed on? Circuit breakers are great for snack breaks. One circuit-breaker critic told The Wall Street Journal he used last Thursday’s 15-minute hiatus to drink a much-needed vegan smoothie.

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