Trading Curb

Trading Curb

A trading curb, also called a "circuit breaker," is the temporary halting of trading so that excess volatility can be reined in and order restored. The S&P 500 Index serves as the reference index for daily calculations of three breakpoints (Levels 1, 2, and 3) that would cause trading halts. **Level 1** is a 7% decline from the previous day's close of the S&P 500 Index, which will result in a 15-minute trading halt; however, if the 7% decline occurs within 35 minutes of market close, no halt will be imposed. Under current rules, a trading halt on an individual security is placed into effect if there is a 10% change in the value of a security that is a member of the S&P 500 Index, Russell 1000 Index, or QQQ ETF (exchange-traded fund) within a five-minute time frame, 30% change in the value of a security whose price is equal or greater than $1 per share, and 50% change in the value of a security whose price is less than $1 per share. Temporary halts to trading give market participants time to think about how they want to respond to large and unexpected movements of market indexes or individual securities when the curbs are lifted. Governed by Securities and Exchange Commission's (SEC) Rule 80B, a trading curb is a temporary restriction on trading in a particular security or market, designed to reduce excess volatility.

A trading curb is a temporary measure that halts trading; curbs are intended to minimize panic-selling on U.S. stock exchanges.

What Is a Trading Curb?

A trading curb, also called a "circuit breaker," is the temporary halting of trading so that excess volatility can be reined in and order restored.

When such a halt is triggered, markets are said to be "curbs in".

A trading curb is a temporary measure that halts trading; curbs are intended to minimize panic-selling on U.S. stock exchanges.
Trading curbs were first implemented after the Black Monday stock market crash on Oct. 19, 1987, to help minimize negative feedback loops and moderate intraday volatility.
The S&P 500 Index is used for the daily calculations of three trading curb levels that would cause trading halts if reached.

Understanding Trading Curbs

Governed by Securities and Exchange Commission's (SEC) Rule 80B, a trading curb is a temporary restriction on trading in a particular security or market, designed to reduce excess volatility. Trading curbs were first implemented after the stock market crash on Oct. 19, 1987 (known as "Black Monday"), as program trading was thought to be the primary cause of the plunge. The rule was amended in 2013 in response to the so-called Flash Crash of May 6, 2010.

The purpose of trading curbs is to allow the market to catch its breath when it is rocked by extreme volatility. Temporary halts to trading give market participants time to think about how they want to respond to large and unexpected movements of market indexes or individual securities when the curbs are lifted. The circuit breakers apply to all equities, options, and futures on U.S. exchanges.

Some analysts believe that trading curbs are disruptive and keep the market artificially volatile because they cause orders to build at the limit level and decrease liquidity. Critics of circuit breakers argue that if the market were allowed to move freely, without any halts, they would settle into a more consistent equilibrium.

Curbs In Levels

The S&P 500 Index serves as the reference index for daily calculations of three breakpoints (Levels 1, 2, and 3) that would cause trading halts.

Under current rules, a trading halt on an individual security is placed into effect if there is a 10% change in the value of a security that is a member of the S&P 500 Index, Russell 1000 Index, or QQQ ETF (exchange-traded fund) within a five-minute time frame, 30% change in the value of a security whose price is equal or greater than $1 per share, and 50% change in the value of a security whose price is less than $1 per share.

For individual securities, trading curbs can be triggered if the price is increasing or decreasing. By contrast, circuit breakers that relate to broad market indices are only triggered based on downward price movements.

History of Trading Curbs

On Oct. 19, 1987, known as Black Monday, many securities markets across the world crashed, creating a kind of domino effect. In the U.S., the Dow Jones Industrial Average (DJIA) — an index that serves as a general indicator of the state of the stock market and economy as a whole — crashed by 508 points (which was 22.61%).

In the wake of this crash, then-President Ronald Reagan assembled a committee of experts. Reagan tasked them with coming up with guidelines and limits to prevent a total market crash again. The committee, called the Brady Commission, determined that the cause of the crash was a lack of communication because of a fast market, leading to confusion among traders and the freefall of the market.

To solve this problem they instituted a device called a circuit breaker, or a curb, which would halt trading when the market hit a certain volume of loss. This temporary stop of trading was designed to give the traders space to communicate with each other. The original intention of the circuit breaker was not to prevent dramatic swings in the market but to give time for this communication.

Since that time, other trading curbs have been instituted and have come in and out of use, including a program trading curbs that lasted for five days in November 2007.

Related terms:

Black Monday

Black Monday, Oct. 19, 1987, was a day when the Dow Jones Industrial Average fell by 22% and marked the start of a global stock market decline. read more

Circuit Breaker

Circuit breakers temporarily halt trading on an exchange when a security or broad index moves in excess of a pre-set threshold amount. read more

Curbs In

Curbs in is a term used in investing to signify when trading curbs are active.  read more

Dow Jones Industrial Average (DJIA)

The Dow Jones Industrial Average (DJIA) is a popular stock market index that tracks 30 U.S. blue-chip stocks. read more

Equity : Formula, Calculation, & Examples

Equity typically refers to shareholders' equity, which represents the residual value to shareholders after debts and liabilities have been settled. read more

Exchange Traded Fund (ETF) and Overview

An exchange traded fund (ETF) is a basket of securities that tracks an underlying index. ETFs can contain investments such as stocks and bonds. read more

Flash Crash

A flash crash is an event in electronic markets wherein the withdrawal of stock orders rapidly amplifies price declines. read more

Futures Contract

A futures contract is a standardized agreement to buy or sell the underlying commodity or other asset at a specific price at a future date. read more

Options

Options are financial derivatives that give the buyer the right to buy or sell the underlying asset at a stated price within a specified period. read more

Russell 1000 Index

The Russell 1000 Index, a subset of the Russell 3000 Index, represents the 1000 top companies by market capitalization in the Unites States. read more