Dust Off Those Circuit Breakers

by Financial Design Studio, Inc. / March 19, 2020

Dust Off Those Circuit Breakers

  financial advisor robert stoll cfp cfa chief investment officer draft commentary Profile About

On October 19, 1987 the stock market crashed, with the S&P 500 falling more than 20% in one day. The move was so swift and so unexpected that stock exchanges weren’t equipped with a game plan for how to handle such volatility.

The solution? Circuit breakers. Let’s see how they work.

The last 3 weeks has seen unprecedented market volatility. In fact, Thursday March 19, 2020 was the first day in 9 days that the stock market didn’t move up or down by at least 4%. Talk about volatile!

With the Coronavirus sweeping across the globe at a rapid pace, markets have had to quickly adjust to a new economic reality.

One that includes a sharp recession given that economic activity has ground to a halt.

Circuit breakers at major stock exchanges have been activated multiple times during these volatile weeks. At their core, they’re designed to give market participants a “breather” when stocks are moving very quickly to the downside. Sort of like a football team calling a timeout when their defense is getting run over by the opposing offense.

Here’s how circuit breakers work:

  • Level 1: Activated when the S&P 500 falls by 7%. Trading is halted for 15 minutes.
  • Level 2: Activated when the S&P 500 falls by 13%. Trading is halted for another 15 minutes. 
  • Level 3: Activated when the S&P 500 falls by 20%. If this breaker is tripped, trading is halted for the rest of the day.

The only exception to the Level 1 and Level 2 rules is if the circuit breaker is tripped in the last half hour of the day’s trading. In that case, stocks won’t be halted and will continue trading into the close. Notably, these breakers don’t apply if the market is moving UP rapidly!

Circuit breakers have been tripped 3 times in March: On March 9, 12, and the 16th. That presents a challenge to traders executing trades for their clients. 

But we’ve been able to handle these timeouts without any issues when making trades for client accounts. We believe these circuit breakers have done a good job honoring their stated purpose: giving investors some time to calm down when markets are moving quickly to the downside. 

Wondering how this affects your future finances? Schedule a call with Financial Design Studio, financial advisors in Deer Park, to discuss your portfolio today.

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