Circuit Breaker Halts Stock Trading for First Time Since 1997

Stock trading halted for 15 minutes after S&P 500 falls 7%

Stock trading was briefly halted Monday for the first time since 1997 after a tumultuous selloff triggered an automatic curb on trading.

Just minutes after the stock market opened, the S&P 500 fell 7% from its previous close—triggering a circuit breaker that halted trading across the entire stock market for 15 minutes. When trading resumed at 9:49 a.m. ET, major indexes managed to come off their lows and hold above them.

The modest reprieve in selling suggested the circuit breaker succeeded in doing what regulators and exchange officials had designed it to do decades ago: give hedge funds, institutional investors and day traders in the midst of a sharp selloff some time to pause and reassess the situation before firing off more orders.

“Cooler heads are prevailing,” said John Spensieri, head of U.S. equity trading at Stifel. He added that for many on Stifel’s trading desk, Monday marked the first time in their careers that they had witnessed a marketwide circuit breaker being triggered.

“The systems, as designed, worked,” said Jonathan Corpina, a senior managing partner at broker-dealer Meridian Equity Partners. “As of now, those were the lows for the day.” Officials introduced circuit breakers after the Black Monday crash of 1987, which sent the S&P 500 tumbling 20%. Many believed the crash had been exacerbated by exchanges flooded by buy and sell orders, and that a mechanism to temporarily halt trading might have helped clear the backlog and calm markets. That led to the creation of the circuit breaker.

But even though the mechanism’s history dates back decades, before Monday, there was only one other instance—Oct. 27, 1997—when marketwide circuit breakers were triggered, said a New York Stock Exchange spokeswoman.On that day, nicknamed “Bloody Monday” by the traders who lived through it, exchanges halted trading twice: once for a half hour when the Dow Jones Industrial Average fell 350 points, and then the second time for the rest of the trading day when the blue-chip average fell 550 points, which at the time was equivalent to a 7.2% drop.

At the time, the threshold for circuit breakers being triggered was pegged to point changes in the Dow.The 1997 episode quickly spurred debate among exchange officials, traders and the Securities and Exchange Commission about whether they should shift to percentage levels, not points, to determine when to halt trading—especially since the stock market’s ascent had rendered a move of 350 points in the Dow less and less significant on a percentage basis.Officials have subsequently revised the circuit breakers multiple times, most recently after the flash crash of 2010.

On that day, the Dow Jones Industrial Average fell nearly 1,000 points, or 9.2%, and then rebounded in a matter of minutes, spurring panic among traders scrambling to figure out what spurred the sharp moves. Because the threshold for an initial marketwide trading halt was set at a 10% decline in the Dow, the frenzied trading was allowed to continue.

In the aftermath of the flash crash, officials revised their guidelines for trading halts, resulting in the system that is in place today.Once the S&P 500 drops 7% from its previous close before 3:25 p.m. ET, trading is halted for 15 minutes. After that, it would take a drop of 13% before 3:25 p.m.—in this case, the S&P 500 falling to 2585.96—for the next circuit breaker to kick in.

That would kick off another 15-minute trading halt.The final threshold for a trading halt is pegged to a decline of 20%. Once the S&P 500 has fallen that much in a single day, trading would be halted for the rest of the day. The market has never triggered trading halts tied to 13% and 20% declines since modern circuit-breaker guidelines went into effect in 2013.

Wall Street Journal - ByAkane Otani - Updated March 9, 2020 1:26 pm ET


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