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Circuit Breakers and Other Market Volatility Procedures

The major stock and commodities exchanges have instituted procedures to limit mass or panic selling in times of serious market declines and volatility. These mechanisms are known as Circuit Breakers, the Collar Rule, and Price Limits. Circuit Breakers establish whether trading will be halted temporarily or stopped entirely. The Collar Rule and Price Limits affect the way trading in the securities and futures markets takes place. Here’s a description of each one:

Circuit Breakers

The securities and futures markets have circuit breakers that provide for brief, coordinated, cross-market trading halts during a severe market decline as measured by a single day decrease in the Dow Jones Industrial Average (DJIA). There are three circuit breaker thresholds—10%, 20%, and 30%—set by the markets at point levels that are calculated at the beginning of each quarter. The formulas for these thresholds are set forth in the New York Stock Exchange (NYSE) Rule 80B.

For example, on July 1, 2000, the average value for the DJIA for the preceding month (June 2000) was used to calculate point levels (rounded to the nearest 50 points). This resulted in the Level One (10%) circuit breaker set at 1,050 points, Level Two (20%) circuit breaker set at 2,100 points, and the Level Three (30%) circuit breaker set at 3,150 points.

Collar Rule

Under NYSE Rule 80A, if the DJIA moves up or down two percent (2%) from the previous closing value, program trading orders to buy or sell the Standard & Poor’s 500 stocks as part of index arbitrage strategies must be entered with directions to have the order executions effected in a manner that stabilizes share prices. The collar restrictions are lifted if the DJIA returns to or within one percent (1%) of its previous closing value.

The 2% collar rule threshold is set by the NYSE at a point level that is calculated at the beginning of each quarter. For example, on July 1, 2000, the average value for the DJIA for the preceding month (June 2000) was used to calculate a point level (rounded to the nearest 10 points). This resulted in the 2% collar rule threshold being set at 210 points.

Price Limits

The futures exchanges set the price limits that aim to lessen sharp price swings in contracts, such as stock index futures. A price limit does not stop trading in the futures, but prohibits trading at prices below the pre-set limit during a price decline. Intra-day price limits are removed at pre-set times during the trading session, such as ten minutes after the thresholds are reached or at 3:30 p.m. (all times are Eastern), whichever is earlier. Daily price limits remain in effect for the entire trading session. Specific price limits are set by the exchanges for each stock index futures contract. There are no price limits for U.S. stock index options, equity options, or stocks.

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You can find the current thresholds by visiting the NYSE's Circuit Breakers and Trading Collars webpage.