US crash: What is a circuit breaker in a stock market; how does it work? | Business Standard News

Sell-off continued on Monday when the US markets opened for trade on Monday. After a sell-off earlier in the day that saw the S&P BSE Sensex tumble nearly 2,500 points intra-day on the back of 30 per cent drop in Brent oil prices to around $30 a barrel, Dow Jones Industrials (DJIA) crashed 2,000 points when trading resumed on Monday in what would be its biggest one-day fall ever.

Trading on US stock exchanges was halted immediately after opening, as the S&P 500 fell 7 per cent, triggering an automatic 15-minute halt.

At 9:54 a.m. ET, the Dow Jones Industrial Average was down 1,791.85 points, or 6.93 per cent, at 24,072.93 and the S&P 500 was down 195.93 points, or 6.59 per cent, at 2,776.44. The Nasdaq Composite was down 530.62 points, or 6.19 per cent, at 8,045.00.

So, what is a circuit breaker or filter?

A circuit breaker is a measure to stem the steep fall or a sharp rise in the price of a security / stock or the index as a whole.

The concept was first introduced back in 1987, when the market crash of October 19, 1987 sent the Dow Jones Industrial Average (DJIA) tumbling 508 points, or 22.6 per cent in a single day. The incident is popularly known as Black Monday, as this rout in US equities triggered a global sell-off.

Back home, Indian stock exchanges implemented index-based market-wide circuit breakers with effect from July 2, 2001. Some modifications were made in September 2013.

The system applies at three stages of the index movement, either way, at 10 per cent, 15 per cent and 20 per cent. These breakers, when triggered, bring about a coordinated trading halt in all equity and equity derivative markets. (See Table; Table Source: NSE)

The market-wide breakers are triggered by a movement of either the S&P BSE Sensex or the Nifty50, whichever is breached earlier. The exchanges compute the Index circuit breaker limits on a daily basis, based on the previous day’s closing level of the index.

In case of illiquid securities or as a price containment measure, the circuit filters, according to BSE, are reduced to 10 per cent or 5 per cent or 2 per cent as the case may be, based on the criteria decided by the Surveillance Department. However, No circuit filters are applicable on Securities on which derivative products are available. That said, BSE imposes 10 per cent dynamic circuit filter on these Securities to avoid punching errors, if any.

circuit breaker chart

via US crash: What is a circuit breaker in a stock market; how does it work? | Business Standard News