What are circuit breakers in the stock market?

COVID-19 has tested circuit breakers at stock exchanges, with the New York Stock Exchange (NYSE) hitting the breaks for 15 minutes on Thursday morning – the second time this week – after panic selling prompted another major sell-off.

And, with the coronavirus outbreak worsening and the economic impact increasing as a result, trading controls mechanisms at major stock exchanges from Wall Street to Shanghai will likely be tested again. But what are circuit breakers and how do they differ from market to market?

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What is the purpose of circuit breakers?

Circuit breakers are a fail-safe measure aimed at curbing panic selling on stock exchanges.

They work by halting trading for a period of time if prices sharply decline below pre-determined levels. In the US, circuit breakers were triggered this week after the S&P 500 fell 7%.

The NYSE has a three-tiered circuit breaker system: level one (7% decline), level two (13%) and level three (20%). A level one or level two decline will see trading suspended for 15 minutes, while a level three circuit breaker will see trading activity halted for the remainder of the session, according to the NYSE.

Circuit breaker systems are regularly revised after flash crashes based on feedback from various stakeholders and financial market participants.

How do they differ market to market?

In China, both the Shanghai and Shenzhen stock exchanges will also suspend trading for 15 minutes if the CSI 300 Index rises or falls by 5% or more from its previous close.

However, both exchanges have a much lower threshold for triggering a complete suspension than the NYSE, with trading halted for the entire day if the CSI 300 Index moves 7% higher or lower from the previous close.

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Circuit breakers are triggered based on slightly different parameters on various exchanges, with trading suspended anywhere between 5 minutes – as is the case on the Hong Kong exchange – or an entire day.

In India, circuit breakers are triggered when the Nifty 50 or Sensex indexes rise above or dip below 10%, 15% and 20% during a trading session. Depending on the size of the limit breached, trading will halt from 15 minutes, 105 minutes or the entire day.