5 things you should know about: market-wide circuit breakers

1. Market-wide circuit breakers are triggered by rapid and extreme price declines in the S&P 500 Index, a widely-followed benchmark for US equities. (A similar mechanism is in place for Canadian stocks but nothing of the sort exists in Europe or Asia Pacific.) Circuit breakers pause trading to let market participants stop and assess the situation.

The following moves trigger circuit breakers:

a 7% decrease in the index measured against the prior day’s close (known as a Level 1 halt)
a 13% decrease measured against the prior day’s close (Level 2)
a 20% decrease measured against the prior day’s close (Level 3)

2. Market-wide circuit breakers halt trading in all symbols on US equity exchanges (whether or not they’re constituents of the S&P 500), as well as all stock options and certain index-related symbols on futures exchanges. Product-specific circuit breakers suspend trading only in certain instruments, such as individual stocks or futures contracts (which we cover in this

explainer

3. Level 1 and Level 2 halts can occur only between 9:30am and 3:25pm. If a 7% or 13% decline occurs at or after 3:25pm, trading continues. Level 3 halts can happen at any time during regular trading hours. Level 1, 2 and 3 halts can occur only once during a trading day. So if a Level 1 halt occurs, markets must decline at least 13% before a Level 2 halt kicks in. It’s worth highlighting that market-wide circuit breakers don’t apply during extended trading hours, a topic we address in this

paper

4. When a Level 1 or Level 2 halt occurs, trading pauses for 15 minutes. In a Level 3 breach, trading stops for the rest of the day. The trading pauses are intended to establish calm. During the halt, a reopening auction takes place, after which trading resumes. After a Level 3 halt, regular trading resumes the next day with a normal opening procedure.

5. Level 1 circuit breakers have been triggered just four times: on March 9, March 12, March 16 and March 18, 2020 during the coronavirus outbreak. Market-wide circuit breakers were also triggered several times on Oct. 27, 1997, during the Asian financial crisis, but that was an earlier version linked to the Dow Jones Industrial Average. To date, markets haven’t experienced any Level 2 or Level 3 halts.

Our
paper
in which we advocate for improving market-wide circuit breakers during pre-open/extended trading hours.
A
guide
from Optiver that explains how price controls work for individual instruments traded on US exchanges.
Our LinkedIn
Pulse
explaining daily price limits in wheat futures.
A CNBC
editorial
about market-wide circuit breakers from March 2020.

View all

Options pricing

Options

The Options Basics Explainer introduced the concepts of call and put options, strike price, expiry, and long or short positions in an option contract. This page looks in more detail at option pricing.

Options

What are options? An option is a type of derivative contract that gives the holder the right to buy or sell the underlying asset at a predetermined price – the exercise or strike price – at or before a certain date. Options exist on a wide variety of underlying assets, like single stocks, indices, ETFs, bonds, currencies, commodities. These contracts can serve as tools to protect a portfolio against potential losses or to express an opinion about the direction of the market.

Put options

Options

What do long/short positions in put options mean? In the simplest terms, there are four positions an investor can take in options: buying call options (long call), selling/writing call options (short call), buying put options (long put), and selling/writing put options (short put).

Options strategies (long straddle)

Options

Besides buying or selling single options, there are many other possible strategies that involve positions in multiple options simultaneously, as well as combining options with positions in the underlying assets.

Option Greeks

Options

The Option Greeks are a collection of variables that measure the sensitivity of option prices to changes in underlying factors. Mathematically, they are derivatives of components of option pricing models. Each factor has a Greek letter assigned to it, hence the name ‘Greeks’.

ETFs

Options

What is an ETF? An ETF – or exchange traded fund – is a fund formed by a basket of underlying instruments that can be traded on the exchange. ETFs are often (but not always) tracking an index and following the index methodology, providing investors a low-cost and efficient way to invest in an index without having to buy all the underlying constituents.

5 things you should know about: market-wide circuit breakers

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