Description On the
New York Stock Exchange (NYSE), one type of trading curb is referred to as a "circuit breaker". These limits were put in place beginning in January 1988 (weeks after
Black Monday occurred in 1987) in order to reduce market
volatility and massive panic sell-offs, giving traders time to reconsider their transactions. The regulatory filing that makes circuit breakers mandatory on United States stock exchanges is
Securities and Exchange Commission Rule 80B, which lays out the specifics of circuit breakers and price limits. The most recently updated amendment of rule 80B went into effect on April 8, 2013, and has three tiers of thresholds that have different protocols for halting trading and closing the markets. At the start of each day, the NYSE sets three circuit breaker levels: Level 1 is 7%, Level 2 is 13%, and Level 3 is 20%. These thresholds are percentage drops in the
S&P 500 Index, relative to the value at the close of the preceding
trading day. Level 1 and 2 declines each cause at least a 15-minute halt in trading (unless they occur after 3:25 pm, in which case no halt occurs). A maximum of one halt per level can occur each day. A Level 3 decline will halt trading for the remainder of the day. Circuit breakers are also in effect on the
Chicago Mercantile Exchange (CME) and all subsidiary exchanges where the same thresholds that the NYSE has are applied to equity index
futures trading. However, there is a CME-specific price limit that prevents 7% increases and decreases in price during after hours trading. Base prices for which the percentage thresholds are applied are derived from the weighted average price on the future during the preceding trading day's last thirty seconds of trading. Price limits for equity index and foreign exchange futures are posted on the CME website at the close of each trading session. There is a security-specific circuit breaker system, similar to the market wide system, that is known as the "Limit Up – Limit Down Plan" (LULD). This LULD system succeeds the previous system that only prevented dramatic losses, but not speculative gains, in a short amount of time. This rule is in place to combat security-specific volatility as opposed to market wide volatility. The thresholds for a trading halt on an individual security are as follows. Each percentage change in value has to occur within a 5-minute window in order for a trading halt to be enacted: • 10% change in value of any security that is included in the S&P 500 index, the
Russell 1000 index, and the
Invesco PowerShares QQQ ETF. • 30% change in value of any security that has a price equal to or greater than $1 • 50% change in value of any security that has a price less than $1 The previous trading day's closing price is used to determine which price range a specific security falls into.
Founding Following the stock market crash on
October 19, 1987, the United States President
Ronald Reagan assembled a Task Force on Market Mechanisms, known as the Brady Commission, to investigate the causes of the crash. The Brady Commission's report had four main findings, one of which stated that whatever
regulatory agency was chosen to monitor equity markets should be responsible for designing and implementing price limit systems known as circuit breakers. The original intent of circuit breakers was not to prevent dramatic but fair price swings, rather to allow time for sufficient communication between traders and specialists. In the days leading up to the crash, price swings were dramatic but not crisis-like. However, on Black Monday the crash was caused by lack of information flow through the markets among other discrepancies such as lack of uniform
margin trading rules across different markets.
Instances of use On
October 27, 1997, under the trading curb rules then in effect, trading at the New York Stock Exchange was halted early after the Dow Jones Industrial Average declined by 550 points. This was the first time US stock markets had closed early due to trading curbs. Since 1997, circuit breakers have evolved from a
Dow Jones Industrial Average points-based system into a percentage change system that tracks the S&P 500. Then
SEC Chairman
Arthur Levitt Jr. believes this use was unnecessary, and that market price levels had increased so much since circuit breakers were implemented that the point based system triggered a halt for a decline that was not considered a crisis. Some, like
Robert R. Glauber, suggested in the aftermath of the circuit breaker tripping that trigger points be increased, and automatically reset by formula on an annual basis. On March 18, the breaker was triggered again at 1p.m., several hours after trading opened.
Program trading curbs The NYSE formerly implemented a curb on
program trading under certain conditions. A program trade is defined by the NYSE as a basket of stocks from the S&P 500 where there are at least 15 stocks or where the value of the basket is at least $1 million. Such trades are generally automated. When activated, the curbs restricted program trades to sell on upticks and buy only on downticks. The trading curbs would become activated whenever the
NYSE Composite Index moved 190 points or the Dow Jones Industrial Average moved 2% from its previous close. They remained in place for the rest of the trading day or until the NYSE Composite Index moved to within 90 points or the Dow moved within 1% of the previous close. Since over 50% of all trades on the NYSE are program trades, this curb was supposed to limit volatility by mitigating the ability of automated trades to drive stock prices down via
positive feedback. This curb was fairly common, and financial television networks such as
CNBC often referred to it with the term "curbs in". On November 7, 2007, the NYSE confirmed that the exchange has scrapped this rule from November 2, 2007. The reason given for the rule's elimination was its ineffectiveness in its purpose of curbing market volatility since it was enacted in the wake of the 1987 stock market crash under the belief that it may help prevent another catastrophic market crash. ==Japan==