Circuit breakers are measures approved by the SEC to curb panic-selling on U.S. stock exchanges and excessive volatility – large price swings in either direction – in individual securities. Also known as “collars,” circuit breakers temporarily halt trading on an exchange or in individual securities when prices hit pre-defined tripwires, such as a 13 percent intraday drop for the S&P 500, or a 15 percent rise in a company’s share price over five minutes.
BREAKING DOWN Circuit Breaker
Regulators put the first circuit breakers in place following the market crash of October 19, 1987, when the Dow Jones Industrial Average (DJIA) shed 508 points, or 22.6 percent, in one day. The crash, which began in Hong Kong, affected markets all over the world, and has come to be known as Black Monday.
A second incident, the flash crash of May 6, 2010, saw the DJIA lose 998.5 points, or over 9%, in just ten minutes. Prices recovered—or very nearly—before market close, but the failure of post-1987 circuit breakers to halt a fat-finger trade and the panic it caused led FINRA , the exchanges and the SEC to develop a new market-soothing regime. (The “fat-finger trade” theory, which posited that an inattentive trader had typed too many zeros and thus placed a gargantuan sell order, later proved false. London-based trader Navinder Singh Sarao is thought to have caused the crash through the use of spoofing algorithms, but his alleged role was not revealed until his arrest in April 2015, after the current circuit breakers were put in place.)