Circuit breakers temporarily halt trading on an exchange or in individual securities when prices hit pre-defined levels to curb panic-selling on U.S. stock exchanges and excessive volatility – large price swings in either direction – in individual securities.
Market-Wide Circuit Breakers
If the index falls to 7% below its previous close, this is known as Level 1; Level 2 is a 13% drop; Level 3 a 20% drop. Level 1 or 2 will halt trading on all exchanges for 15 minutes, unless it occurs at or after 3:25 pm, in which case trading is allowed to continue. Level 3, whenever it occurs, will halt trading for the remainder of the trading day (9:30 am to 4:00 pm).
Single-Stock Circuit Breakers
The SEC has used a “limit-up limit-down” mechanism to determine the thresholds for acceptable trading. Acceptable up-or-down trading range is 5% for Tier 1 National Market System (NMS) securities: S&P 500- and Russell 1000- listed stocks, some exchange-traded products; price greater than $3.00 (price > $3.00), 10% for Tier 2 NMS securities: other stocks priced over $3.00 (p > $3.00), 20% for other stocks priced greater than or equal to $0.75 and less than $3.00 ( $0.75 ≤ p ≤ $3.00) and lesser of 75% or $0.15 for other stocks priced less than $0.75 (p < $0.75). Additionally, these price bands double during the opening and closing periods of the trading day. If trading outside of these bands persists for 15 seconds, trading is halted for five minutes. The reference price is calculated using the average price over the previous 5 minutes. The maximum allowed pause is 10 minutes.