In todays video, we are going to discuss one of the ways the SEC (Securities and
Exchange Commission) regulates the market - Circuit Breakers. Circuit breakers were
introduced to prevent another event like the Black Monday of 1987, when the Dow
Jones fell by 22.6%, in a single trading day, by pausing trading if the S&P 500
price falls too low. After being tested for the first time in 1997, they were
triggered again in March 2020. So, why did that happen and how do circuit breakers
work? What are circuit breakers? Circuit breakers, which are
calculated daily, are set at 7%, 13% and 20%
of the closing price of the S&P500 for the previous day. If the price
drops 7% in a single session, trading is halted for 15 minutes,
and, depending on what happens next, trading may be halted again temporarily
or for the rest of the day. How do circuit breakers work? There are three levels:
A level 1 circuit breaker is applied when there is a single-day,
single-session decline of 7%. Trading is paused for 15 minutes
to give traders the chance to reevaluate their options and stop panic selling.
If there is improvement when trading is reopened after the break
the session will continue as usual. If the drop continues and reaches 13%
before 3:25pm (New York time), a level 2 circuit breaker will be applied
and trading will be stopped for another 15 minutes.
If the drop continues still further and reaches 20%, the situation is considered
critical and a level 3 circuit breaker will come into force.
At this highest level, trading is stopped for the rest of the day regardless of what time it is.
Are circuit breakers used only for market indices? No, theyre not!
Individual securities have their own circuit breakers, known as the Limit Up-Limit Down rule
which means that trading is stopped whenever the price moves too far up
or down away from predetermined acceptable levels.