Curbs In

What Is Curbs In?

Curbs in is a phrase used to indicate the temporary condition of a market that may have moved too quickly in one direction. The phrase indicates that trading curbs are in effect and active on one or more securities exchanges. Curbs are restrictions or limits on trading a specific security, basket of securities, index, or even the entire market. During a condition referred to as curbs in, trading is suspended. When curbs are no longer in effect after having been activated, the condition is referred to as "curbs out." 

How Curbs In Works

Curbs in is a term used to signal that a halt in trading—also known as a circuit breaker—has been triggered, and is currently in effect. Circuit breakers are mechanisms that trigger a halt or suspension of trading of either a specific security—or the entire market—when a pre-defined amount of price drop occurs. Curbs are used in securities markets all across the world.

The curbs policies for the New York Stock Exchange (NYSE) were first defined and instituted in 1987; they are codified in the Securities and Exchange Commission (SEC) Rule 80B. Currently, Rule 80B has three levels of curb that are set to halt trading when the S&P 500 Index drops 7%, 13%, or 20%. Curbs implemented on exchanges are executed separately from futures markets, which may have trading limits, either up or down, for a given overnight session.

Some analysts believe that curbs keep the market artificially volatile by causing momentum when the market hits a limit and trading stops. They maintain that if securities and the market were allowed to move freely, a more consistent equilibrium would be established.

History of Curbs

On October 19, 1987, known as Black Monday, many securities markets across the world crashed, creating a kind of domino effect. In the U.S., the Dow Jones Industrial Average (DJIA)—an index that serves as a general indicator of the state of the stock market and economy as a whole—crashed by 508 points (which was 22.61%). In the wake of this crash, then-President Ronald Reagan assembled a committee of experts. Reagan tasked them with coming up with guidelines and limits to prevent a total market crash again. The committee, called the Brady Commission, determined that the cause of the crash was a lack of communication because of a fast market, leading to confusion among traders and the freefall of the market.

To solve this problem they instituted a device called a circuit breaker, or a curb, which would halt trading when the market hit a certain volume of loss. This temporary stop of trading was designed to give the traders space to communicate with each other. The original intention of the circuit breaker was not to prevent dramatic swings in the market but to give time for this communication.

Since that time, other trading curbs have been instituted and have come in and out of use, including a program trading curbs that lasted for five days in November 2007.