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What Happens When Circuit Breakers Trigger Market-Wide Trading Halts
Written by The Inspired Investor Team | Published on March 12, 2020
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Markets have experienced some big drops over the years, but what happens if there’s such panic that stocks plummet so significantly that everyone tries to sell at the same time? To avoid a massive decline in the market, regulatory measures kick in to automatically pause trading across the market for a short period of time. These circuit breakers are meant to dissuade panic selling and help restore calm during rapid market falls. During these pauses, you can’t buy or sell stocks on the affected exchange.
The Ontario Securities Commission explains, “A market-wide circuit breaker is a regulatory measure that temporarily halts trading on all Canadian marketplaces (exchanges and alternative trading systems (ATSs)) if there is an extraordinary stock market decline. During this time, you will not be able to buy or sell stocks on any Canadian marketplaces, including the Toronto Stock Exchange.”1
The purpose of circuit breakers is to allow time for investors to better assess what’s happening with the markets and make informed decisions. In order to maintain fair and orderly markets, three levels of circuit breakers have been put into place:
|
Level of halt |
S&P 500 Index decline |
Length of halt before 3:25 p.m. |
at or after 3:25 p.m. |
|
Level 1 |
7% |
15 minutes |
trading continues |
|
Level 2 |
13% |
15 minutes |
trading continues |
|
Level 3 |
20% |
trading halts and does not resume for the remainder of the trading day |
trading halts and does not resume for the remainder of the trading day |
Circuit breakers were adopted shortly after the Black Monday crash of Oct. 19, 1987, when the Dow Jones Industrial Average plunged by 22 percent. They were triggered for the first time in 19972 during the Asian financial crisis and then again at the onset of the COVID-19 pandemic in March 2020, when markets experienced four separate days of circuit breakers.3
Once the pause is over – and cooler heads potentially prevail – people can trade as normal, at least until another major market decline occurs. To be sure, these market-wide circuit breaker events are rare, but clearly, they can happen. Besides trying to calm investors, they were also created to maintain investor confidence in extremely turbulent times and prevent a total market crash.
In Canada, the Canadian Investment Regulatory Organization (CIRO) is responsible for maintaining the circuit-breaker mechanism. The changes in the value of the S&P 500 Index are the basis for market-wide circuit breaker triggers. In case U.S. markets are not open, the S&P/TSX Composite Index is used instead.4
Sources
1 Get Smarter About Money, “Market-wide circuit breakers”
2 CNBC, “20 years ago Friday, this unprecedented trading curb kicked in”, October 2017
3 NYSE, “Report of the Market-Wide Circuit Breaker (“MWCB”) Working Group Regarding the March 2020 MWCB Events”, March 2021
4 CIRO, “Guidance on Market-wide Circuit Breakers”, February 2013
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