Can the world’s financial markets suddenly stop?
Here is a big question, “Can the world financial markets stop?”
Introducing: The “Trading Curb”
A trading curb (typically known as a circuit breaker in Wall Street parlance) is a financial regulatory instrument that is in place to prevent stock market crashes from occurring, and is implemented by the relevant stock exchange organization. Since their inception, circuit breakers have been modified to prevent both speculative gains and dramatic losses within a small time frame. When triggered, circuit breakers either stop trading for a small amount of time or close trading early in order to allow accurate information to flow among market makers and for institutional traders to assess their positions and make rational decisions.https://en.wikipedia.org/wiki/Trading_curb
What is the purpose?
The purpose of trading curbs is to allow the market to “catch its breath” when it is smashed by extreme volatility. Temporary halts to trading give traders time to think about how they want to respond to large and unexpected movements of market indexes or individual securities when the curbs are lifted. The circuit breakers apply to all equities, options, and futures on U.S. exchanges. The S&P 500 Index serves as the reference index for daily calculations of three break points (Levels 1, 2, and 3) that would cause trading halts.
- Level 1 is a 7% decline from the previous day’s close of the S&P 500 Index, which will result in a 15-minute trading halt; however, it the the 7% decline occurs within 35 minutes of market close, no halt will be imposed.
- Level 2 is a 13% decline that will also cause a 15-minute halt; similarly, there would be no stop in trading if the 13% decline occurs within 35 minutes of market close.
- Level 3 is a 20% drop that will result in the closing of the stock market for the remainder of the day.
For individual securities, circuit breakers can be triggered regardless of whether the price is increasing or decreasing. By contrast, circuit breakers that relate to broad market indices are only triggered based on downward price movements.