The Curious Investor

I mentioned the term circuit breaker in yesterday’s post on government intervention in falling markets without really defining it. Circuit breakers are a market euphemism for trading curbs which are instituted during particularly intense draw downs in the broad market. They typically refer to stoppages of trading by the NYSE and were instituted after Black Monday when panic followed by computerized trading algorithms turned what should have been an orderly correction into one of the most massive sell-offs of all time with the Dow falling over 22% in one day.

Trading curbs for the NYSE are triggered by specific levels of the Dow. As of Q4 2007, the curbs are as follows:

Fall in the Dow	Before 2PM	After 2PM
1350pt	1 hour halt	1/2 hour halt before 2:30. No halt otherwise.
2700pt	2 hour halt. 1 hour halt after 1.	Market closes
4050pt	Market closes	Market closes

These levels are set at 10%, 20%, and 30% draw downs each quarter, so the point levels can change from time to time.A circuit breaker is just one of several strategies implemented by stock exchanges or the government in order to prevent undue panic from crippling financial markets. Typically, these strategies are devised to allow traders to rethink their decisions and allow information to disseminate throughout the markets in hopes of staving off volatility and panic. They also prevent market participants from jumping onto falling stocks and driving them downwards with short sells in hopes of taking advantage of falling prices.