Definition
The term circuit breaker refers to the policies and procedures that halt or stop trading when securities fall by a given percentage over a specified period of time. Circuit breakers were put into place by the Securities and Exchange Commission following the Stock Market Crash of 1987.
Explanation
On October 19, 1987, also known as Black Monday, the Dow Jones would decline 508 points, losing 22% of its value in just a single day. Investors would also lose an estimated $500 billion in assets. The magnitude of the decline on Black Monday is attributed to a combination of panic selling by investors as well as program trading.
Several policies and procedures were introduced by the Securities and Exchange Commission (SEC) following their investigation into the events occurring on Black Monday. The most notable guideline is the circuit breaker concept, which halts trading under certain conditions to address volatility in the United States equities market. As of January 4, 2016, the circuit breaker rules included:
Limit Up Limit Down Mechanism
Applies to an individual stock, and the price band is set at a percentage level above and below the average price of the stock over the preceding five-minutes.
The price limit bands are 5%, 10%, 20%, or the lesser of $0.15 or 75%, depending on the price of the stock.
The price band doubles during the opening and closing periods of the trading day.
If the stock's price does not move back into its price band within 15 seconds, there will be a five-minute trading pause.
Market-Wide Circuit Breaker
A cross-market trading halt can be triggered at three circuit breaker thresholds, including declines of 7% (Level 1), 13% (Level 2), and 20% (Level 3). The triggers are determined using the closing price of the S&P 500 Index on the prior trading day.
A market decline that triggers a Level 1 or Level 2 circuit breaker before 3:25 p.m. will halt market-wide trading for 15 minutes, while a similar market decline "at or after" 3:25 p.m. will not halt market-wide trading.
A market decline that triggers a Level 3 circuit breaker will halt market-wide trading for the remainder of the day.
Related Terms
The term gray swan event refers to an incident of sizable impact, which can be anticipated, but has a relatively low probability of occurring. Often recognized in hindsight, individuals assume the risk of a gray swan event when they invest in financial markets.
Moneyzine EditorNovember 6th, 2024
The term Kennedy Slide of 1962 is used to describe the decline in the stock market that occurred between December 1961 and June 1962. Although the exact cause of the Kennedy Slide of 1962 was never isolated, it was thought to be a result of a swift change in investor sentiment.Moneyzine EditorJanuary 23rd, 2024
The term Black Monday refers to October 19, 1987, when the stock market would lose 22% of its value in a single day as measured by the Dow Jones Industrial Average. Black Monday is considered to be one of the most infamous trading days in the history of investing.Moneyzine EditorNovember 6th, 2024
The term Black Thursday refers to October 24, 1929, which marked the beginning of the Stock Market Crash of 1929. On Black Monday, the Dow Jones Industrial Average would fall 33 points, which was approximately 9% of its value.Moneyzine EditorNovember 6th, 2024
The term Black Tuesday refers to October 29, 1929, which marked the end of the Roaring 20s, and the starting point of the Great Depression. On Black Tuesday, the Dow Jones Industrial Average would fall 30 points, which was around 12% of its value.Moneyzine EditorNovember 6th, 2024
