Over the past few weeks, investors may have been introduced to a new term they weren’t previously familiar with: circuit breakers. Today, we answer a few simple questions about circuit breakers:
What is a circuit break? A circuit breaker is a built-in temporary halt or momentary pause in trading in the stock market.
What are the triggers for a circuit breaker? There are three levels, or thresholds, at which trading will pause, and they are based on movement in the S&P 500 Index. Level 1 occurs when the S&P 500 declines at least 7% from its closing price the day before. Level 2 occurs if the index drops 13% from its close the prior day. After each Level 1 and Level 2 threshold is reached, trading pauses for 15 minutes. If the index ever drops 20% from its prior day’s close, the Level 3 circuit breaker is enacted, at which point trading is discontinued for the rest of the day. Circuit breakers do not apply to strong upward moves in prices.
What is the point of circuit breakers? The original intent of circuit breakers was to stop a market in free fall or prevent panic selling. By halting trading for a set amount of time, investors ideally can reassess market conditions. But the time also allows investors to understand what’s happening in the market, for example in the event of an impactful midday news break.
Three Level 1 circuit breakers have been triggered over the past two weeks: March 9, March 12, and most recently on Monday, March 16. It’s also important to note that some traders have questioned the efficacy of circuit breakers since then, given that they occurred early in trading and lower prices were not likely to have been a surprise to investors those mornings as stocks gapped signifcantly lower. Nevertheless, circuit breakers remain an intentional aspect of the stock market, and ideally give time for buyers and sellers to be matched up more efficiently.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
If your representative is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union.
These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
For Public Use – Tracking 1- 969496