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What Happens When Circuit Breakers Trigger Trading Halts
Written by Judy McKinnon, The News Desk | Published on March 12, 2020
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Extraordinary stock declines triggered automatic market-wide circuit breakers on global exchanges this week, leading to brief halts in early-morning trading on two separate days in North American markets.
Monday's events were the first time since the stock-market crash in 1997 that an automatic trading halt had been triggered, according to media reports. Markets were also temporarily halted again Thursday morning in Canada and the U.S.
When stocks fall too quickly, it can trigger a circuit breaker. That's what happened this week amid ongoing uncertainties over the economic toll of the coronavirus and plummeting oil prices. In essence, circuit breakers trigger a timeout for trading, or a pause, to help restore calm during rapid market declines.
Following Monday's halt, the president of the New York Stock Exchange, Stacey Cunningham, explained in a series of succinct tweets how circuit breakers work and why they exist.
Here's how she describes them:
- If the S&P 500 falls 7 per cent from the prior day's close, it triggers a 15 minute trading halt. If it falls 13 per cent before 3:25 p.m., trading halts again for 15 minutes. And if it falls 20 per cent, then all trading remains halted the rest of the day.
- Market-wide circuit breakers enforce a trading pause so that investors have time to absorb information, better understand what's happening in the market, and make decisions accordingly.
- The halt in trading this morning means that the market-wide circuit breakers functioned exactly as designed.
Circuit breakers were adopted shortly after the Black Monday crash of Oct. 19, 1987, when the Dow Jones Industrial Average plunged 508 points, or 22 per cent.
Early-morning halts on Thursday (March 12) were triggered as markets in both Canada and the U.S. officially plunged into bear-market territory, typically defined as a loss of more than 20 per cent since their peak. On Wednesday, the Dow Jones Industrial Average closed down 20.3% from the record level it reached on Feb. 12, ending the bull market that started on March 9, 2009, according to the Wall Street Journal. Canada's main stock index – the S&P/TSX Composite – also reached bear market territory on Wednesday.
For a roundup of coronavirus coverage, plus timely reminders and tools that can help when markets are volatile, click here.
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