On Monday, July 3, 2017, after-hours trading in several large tech names was affected by some type of glitch that distorted stock prices. Given that we have seen a couple times now where stock prices have been affected by technology, we thought we would highlight the circuit breakers that were approved by the SEC. Circuit breakers are measures that temporarily halt marketwide trading in indexes and individual securities during times of significant price fluctuations. The goal isn’t to stop a decline, but rather to allow some time to curb the panic selling, simmer down and digest all information available to prevent significant speculative gains and losses.
Current index circuit breakers:
If an index were to sell off greater than 7% and cross the Level 1 threshold, then there would be a 15 minute halt in trading. If the index continued to sell off and went through the 13% Level 2 threshold, then another 15-minute pause in trading would occur. If the Level 3 threshold of -20% was triggered, then trading would be halted for the remainder of the day. These thresholds are not in effect for the last 35 minutes of trading.
On the individual stock level, the SEC’s rules state that if an individual stock prices moves more than 10% in a five-minute period, a trading pause is enacted. Similar to the index circuit breakers, the individual stock circuit breakers do not apply to the first 15 minutes of trading in the morning and the last 25 minutes before the close.
We are not calling for a significant market event that would trigger these circuit breakers; we are providing them for educational purposes. We feel it is essential to understand the dynamics of the circuit breakers and how they work.
