Investors awoke today to news about a somewhat unknown market policy called “Circuit Breakers”. Although not new, the current “rules” were put in place in February 2013, primarily due to the inadequate policies that existed during the May 2010 flash crash.
Our situation today started Sunday evening when futures contracts hit “limit down” levels after CME-traded stock index futures sank 5%. This decline halted trading to prevent futures from falling any further.
The 2013 “Circuit Breakers” were put in place to allow markets a “cooling off” period during the day when significant deterioration is occurring rapidly in the markets. The current policy, which is only applicable during trading hours (9:30am – 4pm EST) is….
*Level 1: If the S&P 500 drops 7%, trading will pause for 15 minutes.
*Level 2: If the S&P 500 declines 13%, trading will again pause for 15 minutes if the drop occurs on or before 3:25pm EST. There will be no halt if the drop happens after 3:25 EST.
*Level 3: If the S&P 500 falls 20%, trading would halt for the remainder of the day.
I believe these policies were put in place to protect the average investor from wild market swings due to computer selling, or program selling. Today might be the day we find out how well these intended “protections” help us all.