A:

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.

To learn more about panic selling, see Panic Selling - Capitulation Or Crash? and Profiting From Panic Selling.

RELATED FAQS
  1. How many components are listed on the Dow Jones Industrial Average?

    Learn how many components comprise the Dow Jones Industrial Average and understand the stock index's origins and how it is ... Read Answer >>
  2. What is the difference between the Dow and the Nasdaq?

    The Dow refers to the Dow Jones Industrial Average (DJIA), an important index that indicates how well the overall stock market ... Read Answer >>
  3. What does the Dow Jones Industrial Average measure?

    The Dow Jones Industrial Average (DJIA) is a price-weighted index that measures the daily price movements of 30 large American ... Read Answer >>
  4. Is the Dow Jones a public company?

    Find out how the Dow Jones Industrial Average tracks the health of the U.S. economy. This fluctuating number indicates the ... Read Answer >>
  5. Who or what is Dow Jones?

    Dow Jones is one of the largest business and financial news companies in the world. It owns owns the Dow Jones Industrial ... Read Answer >>
Related Articles
  1. Investing

    Why China Is Suspending Market Circuit Breakers

    Chinese regulators have announced that beginning on January 8th, circuit breakers used to halt its stock markets will be suspended in order to "smooth" trading operations.
  2. Insights

    What's a Circuit Breaker?

    A circuit breaker is a measure taken during large stock exchange selloffs to avert panic selling.
  3. Insights

    Markets Given Boost After Weekend Brexit Poll

    Markets get some relief after weekend poll sees a shift back towards the "Remain" camp
  4. Investing

    4 Consequences of Government Intervention in China's Markets

    Find out how China's intervention into its stock markets has caused unintended consequences that may be worsen its economic crisis.
  5. Investing

    Understanding And Playing The Dow Jones Industrial Average

    Learn strategies for investing in this price-weighted index and how to interpret its movements.
  6. Investing

    Why The Dow Matters

    Although the DJIA only includes 30 stocks, it can tell you a lot about the market as a whole.
  7. Insights

    A History Of Wall Street Profitability

    Learn about the performance of the Dow Jones Industrial Averages (DJIA) through the decades.
  8. Insights

    Biggest Sell-Offs Don't Include Trump (DJI, SPX)

    Trump's effect on the markets wouldn't make this list of the Dow's ten-largest single-day declines.
  9. Investing

    How Now, Dow? What Moves The DJIA?

    Find out how this index tracks market movements and where it falls short.
RELATED TERMS
  1. Halted Issue

    A planned security offering that does not go forward as planned. ...
  2. Held At The Opening

    A situation in which a security is restricted from trading when ...
  3. Circuit Breaker

    Circuit breakers are measures approved by the SEC to curb panic-selling ...
  4. Stock Market Crash Of 1987

    A rapid and severe downturn in stock prices that occurred in ...
  5. Closing

    The end of a trading session. The closing of a trading day halts ...
  6. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average ...
Hot Definitions
  1. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  4. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  5. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  6. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
Trading Center