What is a Trading Curb?

A trading curb, also called "circuit breaker," is the temporary halting of trading so that excess volatility can be reined in and order restored.

Key Takeaways

  • Governed by Securities and Exchange Commission's (SEC) Rule 80B, a trading curb is a temporary restriction on trading in a particular security or market, with the stated goal being to reduce excess volatility so that order can be restored.
  • Trading curbs were first implemented after the stock market crash on Oct. 19, 1987 ("Black Monday"), as program trading was thought to be the primary cause of the plunge.
  • The S&P 500 Index serves as the reference index for daily calculations of three break points (Levels 1, 2, and 3) that would cause trading halts.

Understanding Trading Curbs

Governed by Securities and Exchange Commission's (SEC) Rule 80B, a trading curb is a temporary restriction on trading in a particular security or market, designed to reduce excess volatility. Trading curbs were first implemented after the stock market crash on Oct. 19, 1987 ("Black Monday"), as program trading was thought to be the primary cause of the plunge. The rule was amended in 2013 in response to the so-called Flash Crash of May 6, 2010.

The purpose of trading curbs is to allow the market to catch its breath when it is rocked by extreme volatility. Temporary halts to trading give market participants time to think about how they want to respond to large and unexpected movements of market indexes or individual securities when the curbs are lifted. The circuit breakers apply to all equities, options, and futures on U.S. exchanges. The S&P 500 Index serves as the reference index for daily calculations of three break points (Levels 1, 2, and 3) that would cause trading halts.

  • Level 1 is a 7% decline from the previous day's close of the S&P 500 Index, which will result in a 15-minute trading halt; however, it the the 7% decline occurs within 35 minutes of market close, no halt will be imposed.
  • Level 2 is a 13% decline that will also cause a 15-minute halt; similarly, there would be no stop in trading if the 13% decline occurs within 35 minutes of market close.
  • Level 3 is a 20% drop that will result in the closing of the stock market for the remainder of the day.

Under current rules, a trading halt on an individual security is placed into effect if there is a 10% change in value of a security that is a member of the S&P 500 Index, Russell 1000 Index or QQQ ETF (exchange traded fund) within a five-minute time frame, 30% change in value of a security whose price is equal or greater than $1 per share, and 50% change in value of a security whose price is less than $1 per share.