A circuit breaker represents a situation where the Securities and Exchange Commission (SEC) and National Association of Securities Dealers (NASD) have announced a market-wide (includes NYSE, NASDAQ and OTC securities) trading halt in the event of a substantial one day decline in the value of the Dow Jones Industrial Average (DJIA). This measure was put into place to give investors and traders a moment of time to calm down, and prevent the Dow from dropping even further as a result of panic selling.
More specifically, there are actually different circuit breakers depending on whether the Dow has fallen 10%, 20% or 30%. Since the value of the Dow changes over time, each of these trigger points are re-adjusted in order to be representative of those predefined proportions. As of December 2006, the actual point values corresponding to these trigger points is 1,100, 2,250 and 3,350.
The size of a drop is one factor that influences the length of the trade halt duration; the larger the decline, the longer the trading halt. For example, a 10% decline in the Dow would warrant a one-hour trade halt in most situations, whereas a 30% decline would cause an end in the trading day.
The second factor plays into the length of the halt is the specific time of the day in which the decline occurs. The various organizations have created this rough guide as to how long a trade halt would be during different times of the day.
|--||Before 1pm||1pm - 1:59pm||2pm - 2:30pm||After 2:30pm|
|10% Decline in the DJIA (Level 1 Halt)||1 Hour Halt||1 Hour Halt||30 Min. Halt||No Halt|
|20% Decline in the DJIA (Level 2 Halt)||2 Hour Halt||1 Hour Halt||Market closes||Market closes|
|30% Decline in the DJIA (Level 3 Halt)||Market closes||Market closes||Market closes||Market closes|
|Source: NYSE Group|
For example, the Dow fell 12% at 10:00 a.m., there would be a market-wide halt from 10:00 am to 11:00 am (One hour trade halt). However, if the Dow were to fall another 10% at 11:00 a.m. (a total decline of 22%), then a market wide halt of two hours would happen.
This not to say that the markets only halt trading in the face of a large decline. Material events can also cause the markets to be closed for an indefinite period of time, even if the Dow has technically not reached a level 1 halt condition. For example, as a result of the terrorist attacks on September 11, 2001, trading was halted for about a week.
Find out how the Dow Jones Industrial Average tracks the health of the U.S. economy. This fluctuating number indicates the ...
Learn about the Dow Jones Industrial Average and its impact. This historically significant index provides a daily snapshot ...
Find out the value of the Dow Jones Industrial Average on the Jan. 20, 2009 inauguration of President Obama and how it has ...
Find out when you can trade shares linked to the Dow Jones Industrial Average during NYSE and Nasdaq trading sessions.
A contract between the Federal Deposit Insurance Corporation ...
The difference between an asset’s book value and the amount received ...
The gross cash colloctions expected over the remaining life of ...
The gross amount of collections expected to be obtained through ...
The loss in value of an asset after it has been placed in receivership ...
A type of contract between the Federal Deposit Insurance Corporation ...