Insights


Investment Brief: Circuit Breakers and Electronic Trading

Over the past few weeks, trading on the New York Stock Exchange has halted on multiple occasions due to steep drops in the S&P 500. These drops are the result of the economic disruption and the anticipated negative growth due to the coronavirus outbreak. Historically, halts in trading are a very rare occurrence.

Why Did Trading Halt?

“Circuit breakers” in stock markets are trading halts that happen when a specified index drops by a certain percentage in a given trading day. These circuit breakers were instituted as a result of the 23% crash in the Dow Jones Industrial Average on Black Monday in 1987 (Bloomberg). Pauses in trading are meant to curb volatility and panicked selling, allowing market participants to reassess what they are doing.

What are the Thresholds?

The current circuit breakers in place for the stock market are, as follows:

  • Level 1 occurs with a 7% intraday drop in the S&P 500. This results in a 15-minute pause in trading (unless it happens after 3:25 PM, in which case there is no halt).
  • Level 2 occurs with a 13% intraday drop in the S&P 500. This results in another 15-minute pause in trading (unless it happens after 3:25 PM, in which case there is no halt).
  • Level 3 occurs with a 20% intraday drop in the S&P 500. In this scenario, markets close for the remainder of the day, regardless of when the threshold is reached.

Will Trading Continue When the NYSE Floor Closes?

Beginning on March 23, 2020, the New York Stock Exchange (NYSE) will temporarily close the NYSE equities trading floor and the NYSE American Options trading floor on Wall Street, as well as the NYSE Arca Operations trading floor in San Francisco (CNBC). One of the reasons the NYSE is closing is due to two workers testing positive for coronavirus at the exchange’s screening checkpoint. However, trading will continue and will be temporarily moved to an electronic format.

Prior to the coronavirus outbreak, the vast majority of trading has been done electronically, including the other major stock exchange, Nasdaq, which does not have a physical trading location. This floor closure is something the exchanges have planned for long in advance.

Answers to Some of the Most Frequently Asked Questions:

  • Will retirement plan participants be able to make trades while the physical floor is closed? Yes.
  • Will the market maintain the usual trading hours of 9:30 AM to 4:00 PM Monday through Friday? Yes.
  • Will the stock market continue to function normally? Yes. Only about 18% of the NYSE volume is conducted on the floor, itself. The NYSE has previously conducted numerous tests using purely electronic trading. Stock prices will continue to be driven by the usual market forces, such as sentiment, fundamentals, and trends, etc. Volatility is likely to continue to be high, but due to the result of the coronavirus fallout, and not the floor closure (CNBC).

Should you have questions regarding the stock market halts and/or electronic trading, please contact your Cammack Retirement Group consultant or info@cammackretirement.com.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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