Today, the stock market faces the possibility of halting all trading, a scenario that hasn't occurred since the onset of the pandemic. This potential halt is triggered by what is known as a circuit breaker, a mechanism designed to prevent panic selling or buying.
The New York Stock Exchange utilizes a circuit breaker tied to the S&P 500 index to automatically pause trading in times of extreme market volatility. This system was implemented following the events of Black Monday in 1987, when the Dow Jones Industrial Average plummeted by over 22% in a single day.
Market-wide circuit breakers are activated based on specific percentage declines in the index compared to the previous close. At Level 1, trading across the entire exchange is paused for 15 minutes if the S&P 500 drops by 7%, which would require the index to reach approximately 4972.3.
If the index falls by 13%, Level 2 circuit breakers are triggered, leading to an additional 15-minute trading halt. This level would be reached if the S&P 500 hits around 4651.51. In the event of a 20% decline in the index, trading ceases for the remainder of the day, with the benchmark index needing to drop to approximately 4277.25.
These circuit breakers serve as safeguards to help stabilize the market during periods of extreme volatility and prevent rapid and irrational price movements. While the possibility of trading halts may cause concern among investors, these mechanisms are in place to ensure orderly and efficient market operations.
