Circuit breaker

From MarketsWiki
(Redirected from Circuit Breakers)
Jump to: navigation, search
Not impressed? Tell us how to improve it or sign up to edit.
ICE wiki logo.jpg

In the U.S., major stock, options and commodities exchanges have procedures to limit excessive downward moves in the markets due to panic or mass selling in times of serious market volatility.[1] There are three categories for these mechanisms; circuit breakers, the collar rule and price limits. Under circuit breakers trading may be halted temporarily or stopped entirely.

Circuit breaker levels are set on a quarterly basis. Depending on when the thresholds are hit determines the period of time the markets are halted or whether trading is halted for the balance of the day. The NYSE threshold levels for the Dow Jones Industrial Average are 10 percent, 20 percent and 30 percent. The formulas for these thresholds are set forth in the New York Stock Exchange (NYSE) Rule 80B.[2]

The Collar Rule and Price Limits affect the way trading in the securities and futures markets takes place.

In May of 2010, major stock exchanges agreed to introduce temporary trading limits on individual stock moves. The leaders of six major exchanges agreed to a structural framework, to be refined over the next day, for strengthening circuit breakers.[3]The New York Stock Exchange, NASDAQ, BATS, Direct Edge, ISE and CBOE — and the Financial Industry Regulatory Authority (FINRA) to discuss the causes of the so-called "flash-crash" market decline Of May 6, 2010‎, the potential contributing factors, and possible market reforms.[4]

NYSE Levels

Effective Apr. 15, 1998 the Securities and Exchange Commission (SEC) approved amendments to Rule 80B (Trading Halts Due to Extraordinary Market Volatility) which revised the halt provisions and the circuit-breaker levels. The trigger levels for a market-wide trading halt were set at 10 percent, 20 percent and 30 percent of the DJIA, calculated at the beginning of each calendar quarter, using the average closing value of the DJIA for the prior month, thereby establishing specific point values for the quarter. Each trigger value is rounded to the nearest 50 points.

The halt for a 10 percent decline would be one hour if it occurred before 2 p.m., and for 30 minutes if it occurred between 2 and 2:30, but would not halt trading at all after 2:30. The halt for a 20 percent decline would be two hours if it occurred before 1 p.m., and between 1 p.m. and 2 p.m. for one hour, and close the market for the rest of the day after 2 p.m. If the market declined by 30 percent, at any time, trading would be halted for the remainder of the day.[5]

References

  1. Circuit Breakers and Other Market Volatility Procedures. U.S. Securities Exchange Commission.
  2. Circuit Breakers, Volatility, and the U.S. Equity Markets: Evidence from NYSE Rule 80A. Bank of Japan.
  3. Exchanges to Retool Circuit Breakers. The Wall Street Journal.
  4. Press Release. SEC.
  5. Circuit-Breaker Levels For Second Quarter 2010. NYSE.