The stock market instituted circuit breakers in 1994 to avoid Black Monday sell-offs that occurred in October 1987 which erased 23% of market value in a single session. These circuit breakers halt trading at 7% up or down on the day to give investors and brokers an opportunity to settle down and gain some perspective. The combination of Oil Prices falling 20%, and the continued Coronavirus Fears, with new death-toll numbers in the US sparking fear among investors, the breakers have tripped today, Monday, March 9, 2020.
There shall be no Black Monday here, sir! The breakers did what they were designed to do today. Early in the day’s trading, 15 minutes after opening, Both Major US exchanges tripped the cooling period of 15 minutes. This seemed to have a stabilizing effect, except for oil. However, Trump’s policy on lowered gas prices at the pump may have more to do with oil selling than anything else, however, these results remain to be seen.
Investopedia listed circuit breaker activity since inception.
Level 1 or 2 circuit breakers halt trading on all exchanges for 15 minutes, unless they are triggered at or after 3:25 PM, in which case trading is allowed to continue. Level 3 circuit breakers halt trading for the remainder of the trading day (9:30 AM to 4:00 PM).
In addition to these market-level circuit breakers, there are also circuit breakers for individual securities. Unlike their market-wide counterparts, these individual circuit breakers go into effect whether the price moves up or down. Importantly, exchange-traded funds (ETFs) are treated as an “individual security” under the circuit breaker system, even though they represent portfolios of several securities.
How Circuit Breakers Work
Regulators put the first circuit breakers in place following the market crash of October 19th 1987, when the Dow Jones Industrial Average (DJIA) shed 508 points (22.6%) in a single day. The crash, which began in Hong Kong and soon affected markets worldwide, came to be known as Black Monday.
A second incident, the so-called flash crash of May 6th, 2010, saw the DJIA drop almost 1,000 points (over 9%) in just ten minutes. Prices mostly recovered by market close, but the failure of the post-1987 circuit breakers to halt the crash, caused the regulators to update the circuit breaker system.
Today, the circuit breaker system applies to both individual securities and market indices. For example, since February 2013 we have had market-wide circuit breakers which respond to single-day declines in the S&P 500 index. If the index falls by 7% below its previous close, this is known as a Level 1 decline. A Level 2 decline refers to a drop of 13%, whereas a Level 3 decline refers to a drop of 20%.