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What Is A Fuse?

Views 32952022.06.08

Key points

  • The US stock circuit breaker mechanism was born in 1988, which can stabilize the market and individual stocks to a certain extent.

  • The benchmark index of the index circuit breaker is the S & P 500, which only aims at the decline of the market, with three thresholds of 7%, 13% and 20%.

  • Individual stock breakers include rising circuit breakers and falling circuit breakers, which can be triggered multiple times in a single day.

U. S. stocks fell sharply in March 2020.

The S & P 500 index suffered a rare one-day decline of more than 7% on March 9, 12, 16 and 18, respectively, triggering the stock market circuit breaker and suspending trading.

Not only the majority of investors have been surprised to see each other for a long time, but even Warren Buffett said that it is the first time that he has lived for 90 years to see such a scene.

What is the circuit breaker mechanism of US stocks?

According to the SEC investor website, under special circumstances, the US Securities and Futures Exchange has procedures to coordinate the suspension of cross-market trading, which is called "Circuit Breakers", that is, the automatic suspension mechanism.

The circuit breaker mechanism of US stocks is mainly divided into the overall stock market falling circuit breaker (index circuit breaker) and the individual stock rising and falling circuit breaker (individual stock circuit breaker).

According to the latest circuit breaker mechanism, the benchmark index of the US stock market index is the S & P 500, with individual decline thresholds of 7% (level 1), 13% (level 2) and 20% (level 3).

The background of the fusing mechanism

On Monday, October 19, 1987, dragged down by about 5% of US stocks closing down on October 16, stock markets in the Asia-Pacific region fell sharply after the opening. Hong Kong's Hang Seng Index closed down 10%, followed by European stocks, followed by a 22% drop in the US Dow Jones Industrial average at the close.

On October 20, Hong Kong stocks announced that they would be closed for four days. In October, Sydney fell 41 per cent, London 26 per cent and Toronto 22 per cent.

Because there was no circuit breaker mechanism and rise and fall limit in the stock market at that time, a considerable number of investors' assets evaporated instantly.

In order to deal with the stock market crash and stabilize the market trend, in February 1988, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) formally approved the circuit breakers of the New York Stock Exchange and the Chicago Mercantile Exchange, which were implemented in October of that year.

Continuous improvement of fuse mechanism

At first, the trigger of the US circuit breaker mechanism was based on the number of points rather than the percentage of the market fall. In January 1997, the circuit breaker mechanism in the United States was adjusted to increase the trigger threshold by 100 points respectively.

On October 27th, the Dow tumbled 7.18% to close at 7161.15, the biggest drop since 1915, the first time a circuit breaker had been triggered. But the next day the Dow rebounded 337.17 points, or 4.71%, to close at 7498.32.

In response to these two days of market trading, the Securities and Exchange Commission asked the Market Regulatory Department to conduct a retrospective study and find out the answer to the question of "how the circuit breaker mechanism affects the stock price trend".

On April 15, 1998, the adjusted circuit breaker mechanism was put into practice. The correction is mainly in two aspects: raising the threshold standard and determining the circuit breaker threshold of 10%, 20% and 30%; the reference level of the decline is not determined by the previous trading day, but by the New York Stock Exchange at the beginning of each quarter. The trigger benchmark is determined based on the daily closing average of the previous month.

On May 31, 2012, the NYSE modified the index circuit breaker mechanism, which mainly includes the following aspects: first, replace the Dow Jones Industrial average with the S & P 500 as the circuit breaker benchmark index; second, modify the circuit breaker threshold to 7%, 13% and 20%. The new circuit breaker mechanism will be implemented on February 4, 2013.

How does the exponential circuit breaker mechanism work

According to the latest mechanism guidelines, the specific circumstances of index breakers are as follows:

The market decline refers to when the S & P 500 falls from the previous day's close during the regular trading session (9:30-16:00 et). If the trading day is a half-day trading, the closing time will be 13:00.

The primary market circuit breaker means that the market has fallen by 7%; the secondary market circuit breaker means that the market has fallen by 13%; and the tertiary market circuit breaker means that the market has fallen by 20%.

If a circuit breaker is triggered in the primary or secondary market, and it occurs at:

Trading of all stocks in the market will be suspended for 15 minutes between 9:30 and 15:25 EDT.

Trading will not be suspended after 15:25 US Eastern time. If the trading day is half-day trading, the time demarcation point is 12:25.

Based on the primary market circuit breaker, the secondary market circuit breaker market-wide trading suspension, only triggered once a day. For example, a fall of 7% triggers a circuit breaker in the primary market, then the price rebounds, and when it falls again to 7%, it does not break again, unless the price drop triggers a circuit breaker in the secondary market.

At any trading time throughout the day, if the tertiary market circuit breaker is triggered, the whole market will stop trading until the opening of the next trading day.

Before 2020, there was only one index circuit breaker in the history of US stocks, that is, October 27, 1997.

The remaining four occurred in March 2020. From the level point of view, these four times belong to the primary market circuit breaker.

Individual stock fuse break

According to the investor website of the Securities and Exchange Commission, on the basis of the pilot, the Securities and Exchange Commission formally approved a mechanism called "limit up / fall limit (LULD)" in 2012, which imposed trading circuit breakers on S & P 1000 stocks, Russell 1000 Index stocks, ETP (Exchange Traded Products) stocks in the pilot list, and so on.

If the trading price of a stock rises or falls by more than 10% in five minutes, trading needs to be suspended. If the trading price of the stock does not return to the prescribed "price range" within 15 seconds, trading will be suspended for 5 minutes.

For stocks in the S & P and Russell 1000 indices and 430 exchange-traded products trading at more than $3, the "price range" set by the SEC is up or down 5 per cent, while the illiquid "price range" of other illiquid stocks trading below $3 is relaxed to 10 per cent.

If a stock triggers a price limit, and the time is:

Between 9:45 and 15:35 EDT, trading of individual stocks will be suspended for 5 minutes.

Trading will not be suspended after 15:35 US Eastern time. If the trading day is half-day trading, the time demarcation point is 12:35 EDT.

The difference between individual stock breaker and exponential circuit breaker

Compared with the index circuit breaker, the individual stock circuit breaker mechanism has the following five differences:

First, the index circuit breaker is only for the index to fall, there is no limit when rising; individual stock circuit breakers include both falling and rising.

Second, the time cut-off point in the index circuit breaker is from the opening to the closing 35 minutes, while the individual stock circuit breaker is from 15 minutes after the opening to 25 minutes before the close.

Third, index circuit breakers suspend trading for 15 minutes at a time, individual stocks suspend trading for basically 5 minutes at a time, or extend slightly according to the actual situation.

Fourth, the index circuit breaker is based on the comparison between the current point and the previous day's closing price, and the individual stock circuit breaker is based on the range of stock price changes within 5 minutes.

Fifth, the index circuit breaker is only triggered once a day, and the individual stock circuit breaker can be triggered many times in a day.

Take the trend of Game Station (GME) on January 28, 2021 as an example, on that day, stimulated by the enthusiasm of MEME stock speculation, GME shares rose and plummeted. Under the intervention of the circuit breaker mechanism, there were nearly 20 suspensions of trading throughout the day.

In short, with the help of the circuit breaker mechanism, the US Securities Regulatory Commission can effectively control the abnormal rise and fall of the market and individual stocks, and play a stable role in the trend of the market and individual stocks.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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