Buzz
This morning, the S&P 500 dropped so significantly that it forced a temporary halt in trading on the New York Stock Exchange. This wasn’t an error, but a safety mechanism designed to shield investors during periods of extreme market turbulence.
The 'limit down' rule serves to prevent panic selling that can occur after a significant market drop, which can further exacerbate the downturn. Rather than letting the situation spiral, the NYSE initiates a pause to cool things down.
This rule is one part of the broader Limit Up Limit Down system. Both the New York Stock Exchange and NASDAQ enforce these rules to ensure trading stays within sensible boundaries.
The limit down rule has three levels and can be triggered during regular trading hours (9:30 a.m. to 4 p.m. Eastern time). It can apply to various securities, including stocks, bonds, futures, options, and others.
Katherine Ross from TheStreet describes the levels as follows:
At the first level, if the S&P 500 falls by 7%, trading pauses for 15 minutes.
The second level activates when the S&P 500 declines by 13%, which triggers another 15-minute pause, but only if the drop occurs before 3:25 p.m. There will be no pause after that time.
Lastly, level 3 occurs if the S&P 500 drops by 20%, causing trading to halt for the rest of the day.
The last time the limit down 'circuit breaker' was triggered for stocks was in December 2008. The futures limit down rule came into play in 2016 when oil prices plummeted following President Trump’s election. According to Yahoo Finance, the 15% and 20% halts have never been used.
What’s behind the sudden drop? Ongoing concerns over the spread of the coronavirus are making investors uneasy. Additionally, the Federal Reserve announced today that it will provide short-term funding to banks amidst the market volatility. All of this is contributing to investor anxiety, leading some to sell now rather than risk waiting to see how far the market could fall.
