Business, Legal & Accounting Glossary
The stock market circuit breaker has the same purpose as the electric switch in most homes: to shut the system down when the load becomes too high, giving it time to cool off and prevent a meltdown. The load limited by the circuit breaker is rapid downward movement of prices. The circuit breaker is supposed to disrupt herd behaviour and ease capacity constraints. The circuit breaker was conceived after a subsequent investigation of the Black Monday sell-off of 1987 revealed that crashing computers, clogged phone lines, and other capacity bottlenecks exacerbated the decline. The first major test of the circuit breaker system occurred ten years later on another October Monday, when a drop in the Dow triggered first a 30-minute pause circuit breaker and then an early close for the day. Today, the NYSE circuit breaker actions depend upon the time of day and magnitude of market decline, whether 10, 20, or 30 percent. The circuit breaker triggers are revised quarterly to adjust for market level. Other US exchanges have similar circuit breaker procedures.
Following the 1987 stock market crash, stock and commodity exchanges implemented a system of trigger-point rules known as circuit breakers. When stock prices fall too far and too fast, they temporarily restrict trading in stocks, stock options, and stock index futures. Currently, trading on the New York Stock Exchange (NYSE) is halted if the Dow Jones Industrial Average (DJIA) falls 10% before 2:30 p.m., or earlier if the drop is 20%.
However, depending on the time of day the loss occurs, trading could resume.
However, if the DJIA falls by 30% at any point during the day, trading will be suspended for the remainder of the day. The actual number of points the DJIA would need to drop to trigger the trigger is set four times a year, at the end of each quarter, based on the previous month’s average value. The circuit breakers were only triggered once before, on October 27, 1997, when the DJIA fell 554 points, or 7.2 percent, and the shut-down level was lower. In fact, the DJIA has only dropped 10% in a single day three times in its history.
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This glossary post was last updated: 5th April, 2022 | 0 Views.