A 30-year-old piece of market infrastructure has been thrust back into the spotlight after a recent rout in U.S. equities triggered the mechanism for the first time in years.
Following a weekend in which the spread of the novel coronavirus accelerated and Saudi Arabia and Russia kicked off an oil price war, the S&P 500 plunged March 9 when U.S. stocks opened for trading. The 7% drop that happened just minutes into the trading day set off what is known as a circuit breaker, prompting a 15-minute halt designed to provide investors with a chance to play catch-up before the market resumed trading.
The S&P 500 ended the day down 7.8%, marking the worst trading session for U.S. stocks since the 2008 financial crisis. But stocks had slightly bounced back after the forced stoppage ended around 9:49 a.m. ET, sending a signal to Wall Street that the breaker did its job.
Circuit breakers were first introduced in the U.S. stock market after the 1987 market crash now known as Black Monday, which caused stocks to enter an unguarded free-fall. The last time the breakers went off before March 9 was in 1997, according to a NYSE spokesperson.
Marketwide circuit breakers offer traders an opportunity to reassess their systems and pending orders as well, according to Security Traders Association President and CEO Jim Toes, who equated it to a pilot taking a plane off of autopilot to make sure everything is working as intended. It was not just the broad-market trip wires that helped stabilize trading early in the day March 9, either, Toes said in an interview.
Throughout any given trading day, individual securities are dealt within constantly updated price bands in a construct known as limit up/limit down. That model came under fire following the Aug. 24, 2015, flash crash, when only about half of the stocks in the S&P 500 opened on time because of the tight range of prices they were allowed to trade within.
But those bands have been changed in the years since to allow for more flexibility during the open and to avoid incidents like the 2015 flash crash, Toes said.
“If August 24th would have occurred yesterday, I don’t want to think of what would have happened,” Toes said.
The rush of volatility in recent weeks may not be over, though.
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