Circuit breakers: The S&P 500

Regulators first placed a circuit control mechanism following the market crash of October 19th 1987 which became infamously known as Black Monday.

The so-called flash crash triggered a second incident on May 6th 2010 which saw the DJIA drop almost 1,000 points (over 9%) in just ten minutes. The mechanisms proved to be successful as the market recovered relatively unscathed. 

In the past two weeks we have seen market circuit breaker actions kick in on both sides of the ledger as the market has been taking express elevator rides both up in down in unprecedented fashion.

The most bizarre thing about these express elevator rides is that as we move from circuit breaker to circuit breaker, the velocity of the market moves is quantifiably attributable to a black hole void of volume or liquidity, making these elevator rides so much quicker.

Circuit-breaker points represent the thresholds at which trading is halted market-wide for single-day declines in the S&P 500 Index. Circuit breakers halt trading on the nation's stock markets during dramatic drops and are set at 7%, 13%, and 20% of the closing price for the previous day. 

Circuit breaker thresholds:

  • Level 1: A drop of 7% from the previous day's closing price of the S&P 500 triggers a 15-minute trading halt. Trading is not halted if the drop occurs at or after 3:25 p.m. ET.
  • Level 2: A drop of 13% triggers a 15-minute halt. Trading is not halted if the drop occurs at or after 3:25 p.m. ET.
  • Level 3: A drop of 20% triggers a halt for the rest of the trading day, and trading resumes the following day.

Since October 2013, the SEC has used a "limit-up limit-down" (LULD) mechanism to determine the thresholds for fair trading. In this framework, halts are triggered by up-or-down moves outside of certain bands, determined based on the security's price and listing.

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