The automatic response, usually a halt or slowdown, in activity at an exchange in response to certain occurrences in trading. Circuit breakers are designed to reduce market volatility and were instituted following the large market breaks in October 1987 and October 1989. See also suspended trading.
circuit breaker in a stock or futures exchange works in the same way as the
circuit breakers in a home; both cut off electricity before the system becomes
dangerously overloaded. Circuit breakers are designed to stop the market from
going into a free-fall and are intended to restore stability by helping
rebalance the number of sell and buy orders. Separate circuit breakers are
triggered when the Dow Jones Industrial Average (DJIA) drops 10 percent, 20
percent, and 30 percent; the point value of each of these thresholds is calculated
at the beginning of each quarter by the New York Stock Exchange. The amount of time that trading is halted depends
upon the severity of the drop. Circuit breakers were instituted after Black
Monday in October 1987, when the U.S. stock market crashed, and have been
revised after various market sell-offs, including October 1989.
Each stock and futures market also sets
its own individual circuit breakers. In the future market, circuit breakers are
referred to as price limits, which also limit upward movements. Trading collars
limit index arbitrage trades by allowing those trades to be placed only if they
are the opposite of the market’s direction. For example, a buy order could be
processed in a declining market. See also collar and price limits.
The automatic response, usually a halt or slowdown, in activity at an exchange in response to certain occurrences in trading. Circuit breakers are designed to reduce market volatility and were instituted following the large market breaks in October 1987 and October 1989. See also Rule 80A, suspended trading.
A switch that automatically interrupts the flow of electric current if the current exceeds a preset limit, measured in amperes. Circuit breakers are used most often as a safety precaution where excessive current through a circuit could be hazardous. Unlike fuses, they can usually be reset and reused.