Submitted by nsscadmin on
During these turbulent economic times there have been some big shifts in the markets which have led exchanges to use circuit breakers. But what are circuit breakers and when are they used?
Circuit breakers are used to try and mitigate market volatility. When a circuit breaker is tripped, they trigger a pause in trading after a specific rise or decline in the markets, or an individual stock.
There are two different types of circuit breakers. There are market-wide breakers and single stock breakers. The breakers that were used last month were market-wide breakers. The current Canadian regulation around market-wide breakers were introduced in 2013 to harmonize these rules in Canada and the United States.
Market-wide circuit breakers have three levels. In the first level a circuit breaker is triggered if a market drops seven percent from the previous day’s closing. After the circuit breaker is triggered the market is paused for 15 minutes.
In the second level a circuit breaker is triggered if a market drops 13 percent from the previous day’s closing. The markets are again paused for 15 minutes. A level two circuit breaker cannot be triggered past 3:25 p.m.
In the third level, a circuit breaker is triggered if a market drops 20 percent from the previous day’s closing. If this happens trading is halted for the day.
A single-stock circuit breaker is exactly what it sounds like. If triggered it pauses all trading on a single stock for five minutes. This five-minute pause can be extended if warranted.
A single-stock circuit breaker is triggered if the price of a stock increases or decreases by 10 percent or more within a five-minute period. This 10 percent trigger can differ depending on the price of the stock. For example, if the stock price is equal to $1 a 30 percent change is needed to trigger the breaker. For a stock priced less than $1 a 50 percent change is needed to trigger the breaker.
Earlier this month market-wide circuit breakers were triggered numerous times. Prior to these a market-wide circuit breaker had not been triggered since 1997.