Circuit breaker mechanism

25 Aug


The US stock market circuit breaker mechanism refers to a market protection mechanism designed to prevent excessive volatility in the stock market.

In simple terms, if there is an extreme market fluctuation in the U.S. stock market, trading will be temporarily halted for a period of time to provide a buffer for the market.

The activation conditions for the US stock market circuit breaker mechanisms are determined based on the percentage changes in the S&P 500 Index. Here are the rules for the circuit breaker mechanism:

  1. Triggering levels: Circuit breakers will be triggered at three levels when the S&P 500 Index falls by 7%, 13%, or 20%, respectively, pausing trading.

  2. Duration of halt: The first level halt lasts for 15 minutes, the second level halt also lasts for 15 minutes, and the third level halt will continue until the end of the trading day (which means if the index falls by 20% anytime between 9:30 am and 4:30 pm Eastern Time, trading will be halted for the rest of the day).

  3. Order locking: After a circuit breaker is triggered, for the first 15 seconds of trading resumption, all stock prices are locked, and traders can only submit orders without the ability to cancel or modify them.

  4. Communication during halt: Exchanges will issue announcements during the circuit breaker halt to inform investors about the circuit breaker status.

Here's an example:

On March 9, 2020, the U.S stock market experienced a significant decline due to panic selling caused by the pandemic. On that day, the Nasdaq Composite Index fell by over 7%, and the Dow Jones Industrial Average dropped by 7.8%.

With the presence of the U.S. stock market circuit breaker mechanism, trading is halted at 7%, 13%, and 20% declines. This means that on that day, the normal flow of stock trading was interrupted, and investors had to adjust their trading strategies accordingly.

For instance, let's say an investor holds a technology stock listed on the Nasdaq with a market value of $100,000. If the circuit breaker is triggered before the investor sells the stock, trading for that stock will be halted when the Nasdaq Composite Index falls by 7%.

If the investor still holds the stock at that point, they will be unable to sell it or purchase other stocks. If the stock price drops to $80,000 when trading resumes, the investor's investment loss would amount to 20%.

In stock investing, it's important to pay attention to the activation conditions and corresponding halt durations of the U.S. stock market circuit breaker mechanism. When the market experiences abnormal volatility, it is crucial to remain calm and avoid making reactionary decisions.

Therefore, understanding the US stock market circuit breaker mechanism and making appropriate adjustments to investment strategies are essential for investors. It is important to promptly adjust trading strategies when stock prices decline to avoid unnecessary losses.

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