Circuit Breaker

circuit breaker

The automatic response, usually a halt or slowdown, in activity at an exchange in response to certain occurrences in trading. Circuit breakers are designed to reduce market volatility and were instituted following the large market breaks in October 1987 and October 1989. See also Rule 80A, suspended trading.

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Circuit Breaker

On an exchange, a measure designed to prevent panic selling by stopping trading after a security or an index has fallen by a certain amount. For example, if the Dow Jones Industrial Average falls 10% in a trading day, the New York Stock Exchange suspends trade for at least one hour. A circuit breaker is intended to allow investors to determine whether a situation is really as bad as it looks. It is sometimes called a collar. See also: Suspended trading.

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Circuit breaker. After the stock market crash of 1987, stock and commodities exchanges established a system of trigger-point rules known as circuit breakers. They temporarily restrict trading in stocks, stock options, and stock index futures when prices fall too far, too fast.

Currently, trading on the New York Stock Exchange (NYSE) is halted when the Dow Jones Industrial Average (DJIA) drops 10% any time before 2:30 p.m., sooner if the drop is 20%.

But trading could resume, depending on the time of day the loss occurs. However, if the DJIA drops 30% at any point in the day, trading ends for the day.

The actual number of points the DJIA would need to drop to hit the trigger is set four times a year, at the end of each quarter, based on the average value of the DJIA in the previous month.

The only time the circuit breakers have been triggered was on October 27, 1997, when the DJIA fell 554 points, or 7.2%, and the shut-down level was lower. In fact, the DJIA has dropped as much as 10% in a single day only three times in its history.