- Stocks have erased their gains for the year in a volatile week of trading.
- The S&P 500 fell by over 4% during the steepest drop of this week’s selloff on Monday.
- The Securities and Exchange Commission’s so-called circuit breakers trigger if the index falls by 7%, 13%, or 20% from the previous session’s closing price.
The stock market is getting rocked this week.
The Dow Jones industrial average on Monday had its biggest intraday fall in history on a point basis and was down more than 1,500 points, or 5%, at its lows of the day. The benchmark S&P 500 fell nearly 4%.
A 7% decline in the benchmark index would be enough to suspend trading, according to the Securities and Exchange Commission’s rules. It’s a timeout of sorts, in line with the SEC’s mission of ensuring markets are orderly and fair.
So-called circuit breakers are triggered when market sell-offs are so severe that liquidity is affected.
“A cross-market trading halt can be triggered at three circuit breaker thresholds – 7% (Level 1), 13% (Level 2), and 20% (Level 3),” the rule says. “These triggers are set by the markets at point levels that are calculated daily based on the prior day’s closing price of the S&P 500 Index.”
If a sell-off triggers a Level 1 or Level 2 circuit breaker before 3:25 p.m., trading is halted for 15 minutes. A similar market decline at or after 3:25 p.m. would not halt marketwide trading.
If a Level 3 circuit breaker were triggered at any time during the day, though, it would halt trading for the rest of the session.
“The biggest question is if we’re going to see a 7% trigger this week,” said Tobey Wood, a trader and research analyst at Unicom Capital. “We’re still in uncharted territory for how the market would respond to the rules.”
Since they’re based on the prior day’s closing price (2,681.66 for the S&P 500 on Wednesday), the circuit breakers would trigger at these levels:
- Level 1 (-7%): 2,493.94
- Level 2 (-13%): 2,333.04
- Level 3 (-20%): 2,145.33