Can Circuit Breakers Calm a Market Panic?

Stock exchange circuit breakers, which have been triggered a number of times recently, are meant to bring a brief "time out" so that markets and traders can pause for breath

Vikram Barhat 17 March, 2020 | 11:37AM
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The heightened market volatility of the past few weeks has triggered “circuit breakers” on a number of occasions, which is when an exchange suspends market trading because moves are so extreme. This happened on March 9, March 12 and March 16 when US stock markets plunged at the open, forcing the New York Stock Exchange to suspend trading.

The idea behind an automatic halt to trading is to calm panic-stricken markets by forcing investors to take a brief pause from the ongoing chaos, review and reassess the situation, and acquire and assimilate information.

New York Stock Exchange president Stacey Cunningham said the trading halt was “working as it’s designed to function, so that the market can absorb what news was out overnight, how investors are reacting so they can make decisions, and everyone gets a chance to see what’s happening.”

In an era of high-frequency computerised trading, circuit breakers act as a speed bump when markets are in a tailspin and help restore calm. 

What are Circuit Breakers?

In the US, the 15-minute stock market trading halts activate at three thresholds amid sharp and large downturn and volatility: Level 1 triggers a 15-minute trading pause when the market falls 7% below its previous close; a Level 2 trading halt kicks in when the market slides 13%; and, finally, when the index craters 20%, Level 3 is activated, suspending trading for the remainder of the day.

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About Author

Vikram Barhat  is a Toronto-based financial writer specialising in investing, stock markets, personal finance and other areas of the financial services industry.