What Are Circuit Breakers In The Stock Market?
Stock market circuit breakers automatically pause trading when prices fall too fast.
They help to reduce ‘panic selling’ and long term financial damage.
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Hi, Rodrigo, thank you for your question.
I'm just going to answer the first half of that question, what are circuit breakers in the stock markets? And circuit breakers are basically market mechanisms and they pause trading on stock exchanges if the value of a share index drops below a certain threshold in a day's trading.
So in the case of the America's S&P500, there's essentially three levels at which circuit breakers are instituted. You've got like level one, level two and level three. So if there's a level one decline of 7% fall, then that will result in trading pausing for 15 minutes, okay?
If it's level two and you get a 13% drop, then if that happens before or at sort of 3:25 p.m., then you'll get another, that's GMT time, you'll get another 15 minute pause. And level three is if you get a 20% decline, then that decline will close the markets for the day. So just to be aware that those circuit breakers are still in place.
They are slightly different for, you know, each different exchange, so London stock exchange, the Chinese stock exchange, has slightly different rules but these circuit breakers are in place. And the reason they're there is to try to stop panic-driven stock market crashes and they were brought in after what was known in the financial world as Black Monday when there was declines on 1987, October the 19th, the Dow experienced its worst one day percentage fall in history and it fell 22.6%.
So that's what they're there to do, to temporarily stop panic selling and give investors the ability, some time to reflect, understand what the market is doing and make reasoned decisions. There's a kind of domino effect as assets selling off fast cause other assets to sell off fast and they're just gonna fall dominoes over each other so that's what this circuit breaker is designed to do, just sort of stop that panic selling.
Now, in terms of your second question, Rodrigo, how do you sell equity markets in a risk-off environment? Well it's very similar to what we're doing with currencies so when you see that the market is turned into a risk-off mood, you can see that equity markets are falling down, maybe there's been some particularly negative news.
For example, if you've been following the S&P500 and you'd seen the COVID-19 virus spreading, you might decide that, you know, I would be looking to sell the S&P500 and you just use exactly the same principles that we'd use for currency trading. You look for previous support and resistance levels to buy and sell from.
So you just use exactly the same principle and then you're keeping an eye on other equity markets as well as you get a overall feel for what the equity markets are doing. So at the moment, for example, we can see that equity markets are pretty neutral, we've been following this sort of all session and it's gonna be quite tricky.
We've seen some recovery in the European equity markets, the U.S. equity markets haven't really picked up much steam, staying in that range, so today, what we'd like to see, we'd like to see these highs being taken out of the S&P500, the Dow and Hang Seng futures, that would sort of indicate more upside in the U.S. market and it might mean more upside in the European indexes.
Until we see kind of, you know, those previous highs being taken out, the unusual to risk-off tone remains.
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